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PSLV vs. SLV: Battle of the silver ETFs

TWO SILVER ETFS, TWO DIFFERENT APPROACHES

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May

2012

PSLV vs. SLV: Battle of the silver ETFs

by Fred Marion

While they’re both silver ETFs, the iShares Silver Trust ETF (NYSE:SLV) and the Sprott Physical Silver Trust ETV (NYSE:PSLV) operate very differently. Here’s how they work:

The iShares Silver Trust ETF: The fund buys and sells silver in an attempt to have it’s share price match the value of its bullion holdings. If the value of the fund’s shares rise, iShares buys more silver. In theory, the fund’s market cap should equate to the fund’s silver holdings (less fees and liabilities).

Sprott Physical Silver Trust ETV: The Sprott trust operates much like the iShares ETF with one major exception, shareholders have the ability to exchange their Sprott shares for physical silver bullion on a monthly basis.

Although they operate similarly, the two ETFs have been on divergent paths year-to-date with the PSLV down 10 percent and the SLV up 4.8 percent. During the same time, the price of spot silver is up 2.54 percent on the year. It’s clear then that while the ETFs are designed to track an underlying commodity, they definitely come with margins of error.

And that’s actually making PSLV look quite attractive. In the past, the fund has traded at a premium of up to 35 percent above the price of spot silver (apparently investors like the fact that their holdings could be exchanged for physical silver). Today, PSLV’s trading at a premium of just 4.95 percent to the silver spot price.

There are benefits to both the ETFs approaches, though. First, the arguments for PSLV:

1) Redemption. Obviously, investors can choose to exchange their shares for physical silver – something that could come in handy if we do experience a currency crisis in the West.

2) Tax perks. If you plan to hold your silver ETF shares for more than a year, you can claim any appreciation as a long-term capital gain. That’s good for a 15 percent tax rate. Profits from SLV will set you back 28 percent under the current tax code.

3) Safety. The Royal Canadian Mint stores bullion for the Sprott trust. As Sprott writes on its web site, “The Mint is a Canadian Crown corporation, which acts as an agent of the Canadian Government, and its obligations generally constitute unconditional obligations of the Canadian Government.” SLV’s bullion is stored and managed by a private company (JP Morgan Chase: NYSE:JPM) with no government backing (unless, of course, you count the tacit promise of a bailout when times get tough).

Now the arguments for the SLV:

1) Low or no premiums. Since SLV doesn’t have to manage the costs associated with fulfilling delivery, the fund’s holdings trade at a much smaller premium to the price of silver. That’s important as premiums are subject to the whims of potential investors. As I wrote above, PSLV has traded with a premium as high as 35 percent above the price of silver in the past. You may as well go buy and store your own bullion at those prices.

2) Higher volume. A lot of silver ETF investors have no intention (or at least they don’t foresee the desire) to redeem their stock holdings for physical silver. For them, buying and selling shares is simply a vehicle to make money. SLV wins out if that’s your goal as the fund is much more liquid than PSLV. On an average day, more than 1.7 million shares of SLV trade hands compared with less than 100,000 shares of PSLV. This makes going both long or short the SLV much easier.

SLV Vs. PSLV: Which one’s better?

Both funds accomplish the same goal: exposure to the spot price of silver without actually buying silver. In the end, then, it comes down to two factors: security and taxes. If you know you’re going to hold your shares for more than a year (which entitles you to tax benefits) and you value the security of knowing your ETF shares can be redeemed for actual silver, buy PSLV. For all other traders, the SLV is perfect.

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Tags: PSLV, Silver ETFs, SLV
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May

2012

Three signs silver prices have further to fall

by Fred Marion

A month ago, an ounce of silver was worth $33. Today, that same ounce is worth $29.50 – a drop of more than 10 percent. While we’re certain the 12-year bull market in precious metals isn’t over, we do think there could be more pain for silver investors in the near-term. Here’s why:

1) The Gold/Silver Ratio. The gold:silver ratio has been trending up since early March, and that trend probably won’t stop until the ratio re-tests January’s highs around 57:1. Why? Because swing and momentum traders themselves help cause the fluctuations in the gold:silver ratio. So long as the ratio is showing a clearly defined trend, and it’s not nearing any key resistance levels (or psychological barriers), those swing traders are going to short silver. Check out the steady upward climb in the gold:silver ratio:

[Source: Seeking Alpha]

2) Long live the dollar. The greenback can’t seem to do anything wrong. That’s despite explosive growth in True Money Supply (or the sum total of all the cash, deposits and notes that are floating about in our economy). Just check out this chart from Mises.org:

During ordinary economic times, you could expect the yields on U.S. bonds to spike in the face of such aggressive monetary easing. Instead, the dollar looks stable compared to the financial situation across the pond.

The Eurozone “is on a path that leads to eventual dismantling,” Peter Tchir of TF Market Advisors wrote in a note to clients on Monday (per IB Times). “Greece restructured debt, made different rules for different holders, and yet, the new bonds trade at 20% of par.”

Investors are telling the Eurozone countries that they no longer believe there’s a way out. That threat of a Eurozone breakup has bought the dollar some street cred that it probably shouldn’t have – and that’s bad for silver prices.

3) Even die-hard silver bulls are losing some of their excitement over the white metal. “While I do remain very bullish on silver, I must also admit that for the first time I can envision a scenario in which silver does not reach $100,” writes Simit Patel at Seeking Alpha. His reasoning? Gold will likely outperform everything (silver and stocks) if the equity markets remain soft.

Of course, all of the arguments above have me thinking that now might be the perfect time to buy silver. I’m not alone either. Check out my recent post Why Eric Sprott believes silver prices will triple to $100 an ounce in 2012. Just remember that if you do buy, though, you need to be able to hold onto the metal in the face of near-term weakness. Prices may be higher in three months, but what happens between now and then might not be pretty.

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May

2012

Will mushrooming supply crush gold and silver prices in the years to come?

by Fred Marion

One of the most common arguments bears levy against gold and silver is the fact that record prices mean more gold and silver mines. With those mines, they argue, comes a glut of supply that could crush the precious metals markets.

One of the leading voices in this debate is Dr. Paul Walker of precious metals consultancy GFMS Thomson Reuters. At a conference last week in Dubai, Dr. Walker pointed out that it takes some $120-$150 billion of investment demand every year just to keep gold prices flat – not to mention see prices climb higher (per Resource Investor).

That a lot of cash to maintain a baseline, and I would argue that bodes well for silver prices.

“The amount of silver that’s available for investment each year is 450 million ounces and the amount of gold that’s available for purchase is about 70 million ounces, which means you have a ratio of about six-and-a-half to one is amount of silver you can buy versus gold,” Eric Sprott said in a recent interview (per ETFDailyNews).

At current prices, that means investment demand needs to grow by $13.5 billion to keep silver prices where they are. That’s far less than the $120 billion gold prices will need to stay afloat.

Still, silver prices tend to follow gold prices as both metals act as stores of value during periods of inflation. The main indicator for whether or not gold and silver prices can keep up with supply then is the expectation of inflation, and expectations are a fickle thing.

As Dr. Walker pointed out last week, it’s probably not supply that gold and silver investors should be concerned about, but rather the possibility that the Federal Reserve might raise interest rates in an attempt to begin strengthening the dollar. That, he argues, could be the true “Black Swan” event we’ve all been worried about.

We’re not there yet, though. In fact, we just might see all-time record high gold and silver prices again before we ever see the interest rates rise. Check out our posts Silver prices setting up for 30-year high? and Why Eric Sprott believes silver prices will triple to $100 an ounce in 2012 for more.

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Tags: Eric Sprott, gold price forecast, gold price predictions, silver price forecast, silver price predictions
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May

2012

Why Eric Sprott believes silver prices will triple to $100 an ounce in 2012

by Fred Marion

Famed investor Eric Sprott of Sprott Asset Management christened gold the investment of the 2000s. Now, he’s loudly proclaiming that this decade will belong to silver. His pronouncements are particularly interesting as investors seem to have lost interest in the white metal with prices trending down over the past month.

Of course, silver is still in the green this year (up 7 percent around $30 an ounce), but it’s hard to argue the fact that investors are giving the metal the cold shoulder. The gold-silver ratio is in a strong uptrend (per Seeking Alpha), investors fear that the Federal Reserve could potentially raise interest rates after the presidential election and silver production is on the rise.

Despite all those factors, Sprott believes both gold and silver prices will hit new highs before the end of the year. It’s silver, though, that he thinks will shine the brightest. And he bases some of his reasoning on data from the U.S. Mint:

“They sold as many dollars of silver as they sold dollars of gold last year in terms of gold coins,” Sprott said during an April 20 interview with Goldseek Radio. “That means that essentially, with silver trading at a 50 to one ratio, people bought 50 times the amount of silver as did they gold.”

Sprott’s arguments for new highs in the silver market can be boiled down to three factors: silver price manipulation, a gold-silver ratio that could start shifting back toward silver and demand that’s out-pacing supply.

Indeed, industrial demand will be key to ever higher silver prices.

“Annual production is about 900 million ounces per year, including recycling,” Sprott said (per Frank Curzio at Stockhouse.com). “Industrial usage alone will rise to 660 million ounces by 2015. That leaves only 240 million ounces for coinage, central bank purchases, and investment.”

Sprott’s prediction makes silver mining stocks look particularly attractive. “If Sprott is right and silver prices begin pushing toward $100 an ounce, these companies (Fortuna Silver: FSM, Silver Standard: SSRI, and Endeavor Silver: EXK) could go up several hundred percent from these depressed levels,” Curzio writes.

Economically, things feel like they’re improving in the U.S., but that’s just smoke and mirrors, Sprott argues. “It’s a BS rally,” he told an investor audience in Toronto last month (per Gordon Pape). “We have a system that is breaking down.”

When that systems starts showing cracks, Sprott believes silver prices will start climbing. And they won’t stop until we hit new all-time highs for silver.

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Tags: EXK, FSM, silver price forecast, silver price predictions, SSRI
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May

2012

Silver prices setting up for 30-year high?

by Fred Marion

Almost one year ago to the day, silver investors witnessed a miraculous run-up in prices – one of the most aggressive silver price runs in three decades. From late August of 2010 to April of 2011, silver prices did little except go higher from a low near $18 to a peak just below $50 an ounce. That’s a return of 177 percent in 7 months.

Now that the hoopla has died down, a lot of investors are acting like the silver story has run its course. Not so fast says Eric Parnell of Gerring Wealth Management. He argues that what’s really interesting about silver’s peak last year is what happened afterwards – namely that prices didn’t collapse entirely.

“Within two months after this previous peak in 1980, Silver lost over 75% of its value in falling back to $11,” Parnell writes. “However, the same fate has not befallen the white metal this time around. While the losses since have been sizeable – it dropped by -30% within the first month after its April 2011 peak and continued lower through the remainder of the year to post a total peak to trough decline of -44% – it has since stabilized.”

Parnell believes that means silver is setting up to break through that $50 an ounce barrier and keep climbing beyond it. Why? If you look at a three-decade chart pattern for silver, it looks like it’s set the stage for a double top:

There’s been a lot of heartburn for silver investors who held onto their metal after the April highs. And yet, it’s important to remember that the fundamental reasons for the surge in prices still remain intact: governments around the world are aggressively printing money to stimulate their economies. In the face of the inflation that creates, investors and individuals have to find ways to protect their wealth. Silver and other hard assets are one of those ways.

It makes sense after all that silver speculators would aggressively sell their metals when prices neared $50 an ounce. They were in the trade for the quick and easy gain. As soon as the metals started poking its head into uncharted territory, those weak hands jumped ship. Now, we’re trading sideways as bargain hunters wait for prices to fall further. Once we see hedge funds moving back into precious metals, expect the frenzy to start again.

Still not convinced that inflation is on its way? Bookmark the Ludwig von Mises Institute‘s web site, and take a peak at their True Money Supply chart every few weeks:

If that doesn’t keep you honest about the state of the dollar, nothing will.

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May

2012

Why you should never, ever buy silver coins from the Franklin Mint

by Fred Mason

Consider this my public service announcement for the week. You can boil it down to one commandment: “Don’t buy silver coins from the Franklin Mint.” Or – to make it simpler – “Don’t buy anything from the Franklin Mint.”

Fortunately, I don’t speak from experience, but I have seen the Mint’s ads on television and in magazines. They’re memorable in part because the company makes such a desperate attempt to look and sound like they represent the U.S. government without actually having a thing to do with the government. It’s almost like playing “Where’s Waldo?” Instead of searching for Waldo, though, you’re frantically searching for their disclaimer.

Still, I was content to endure their ads without considering the impact they might have on unwitting consumers until I read a recent Q&A in the Chicago Sun-Times titled “‘You’ve been snookered’ on silver coins purchase.”

In the article, a man who identifies himself as “DA in Troy, Mich.,” writes the paper in desperate need of help. He spent the past 25 years gobbling up “$47,000 in collectable silver coins and beautiful non silver coins from the Franklin Mint for my retirement.”

He did it because he thought “the scarcity and limited edition minting of these coins would drive up their value over the years and because I believed the silver content in the silver coins would also increase in value.” Now, he’s on the brink of retirement, and when he looked into selling the coins to a dealer, got offered $2,500 for the lot.

“DA in Troy” wouldn’t have even gotten offered that much if not for the fact that some of the coins he bought actually had silver in them.

“I don’t know of a single item produced by the Franklin Mint that can be sold today for its original cost,” financial columnist Malcolm Berko wrote in response to DA’s questions. “You overpaid for those coins by orders of magnitude. And you probably paid five or six times the value of the silver content for the silver coins you purchased. So while sliver has tripled in price since 1984, the silver value of those coins is still way less than your cost.”

As for the non-silver coins, Mr. Berko recommends that DA try selling them on eBay where he might get $100. It’s a sad story that reinforces one of our constant themes on this site: always do your own due diligence before making any investment decision. Reading a single blog post (even one of ours) and making a snap purchase of stocks or coins is a fast way to lose your hard-earned cash.

If you’re truly interested in investing in silver coins as a safe haven against an economic meltdown, I’d recommend Silver American Eagles (as sold by the U.S. Mint) or junk silver (pre-1965 U.S. quarters that contain 95 percent silver). Because both are quickly and easily verified as real silver, they’re easy to sell. You’ll pay a slight premium over “spot silver prices,” but at least you can rest assured you won’t end up with a drawer full of junk.

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May

2012

Who is the world’s largest silver producer?

by Fred Marion

For years, the title of the “World’s Largest Silver Producer” has been dominated by two companies: Fresnillo PLC (LON:FRES) and BHP Billiton Ltd. (NYSE:BHP). Fresnillo is named after it’s mammoth Fresnillo silver mine in Mexico while BHP operates the Cannington mine in Australia.

Both the Fresnillo and Cannington mines are “primary silver mines,” which means that silver is the predominant metal that’s being mined at the sites. For years, those two mines have helped BHP and Fresnillo take the title as the world’s largest silver producers.

In 2011, though, that crown went to the Polish mining company KGHM Polska Miedz (PINK:KGHPF). What’s interesting about that is the fact that the KGHM doesn’t even have a primary silver mine. It captured the title of the world’s largest silver producer by mining silver as a byproduct of other metals.

The world’s Top 3 silver producers in 2011

1) KGHM Polska Miedz (PINK:KGHPF). 40.5 million ounces of silver.

2) BHP Billiton Ltd. (NYSE:BHP). 38.9 million ounces of silver.

3) Fresnillo PLC (LON:FRES). 37.9 million ounces of silver.

What lead to the changing of the guard? Silver production at the Fresnillo and Cannington is on the decline as the quality of ore coming out of both sites has dropped. Check out last year’s numbers to see the difference.

The world’s Top 3 silver producers in 2010

1) BHP Billiton Ltd. (NYSE:BHP). 46.6 million ounces of silver.

2) Fresnillo PLC (LON:FRES). 38.6 million ounces of silver.

3) KGHM Polska Miedz (PINK:KGHPF). 37.3 million ounces of silver.

[Source: The Market Oracle]

Of course, we can’t read much into these numbers when we’re looking for potential investment opportunities. To do that, I recommend searching for junior mining companies that make good buyout candidates (companies that might get acquired by a BHP or Fresnillo, for instance). Check out some of our recent posts on silver mining stocks for more:

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