Silver ETF: The Double-Edged Fund

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The silver ETF (Exchange Traded Fund) or SLV was created in 2004 with much excitement for the silver (bug) community.

Its warehouse represents the largest known (above ground)silver stockpile on earth.

The silver ETF was designed for those who desire diversification into precious metals but prefer the look and feel like a common stock or security.

In general exchange traded funds have lower costs than other investment products because most are not actively managed and because they are insulated from the costs of having to buy and sell securities to accommodate shareholder purchases and redemptions.

They typically have lower marketing, distribution and accounting expenses.

The SLV is flexibile. All exchange traded funds can be bought and sold at current market prices at any time during the trading day, unlike mutual funds and unit investment trusts, which can only be traded at the end of the trading day.

As publicly traded securities, shares can be purchased on margin and sold short, enabling the use of hedging strategies, and traded using stop orders and limit orders, which allow investors to specify the price points at which they are willing to trade.

(There may be problems with short selling as was recently pointed out by Ted Bulter).

2 Year SLV

From a tax standpoint, an ETF generates relatively low capital gains, because they typically have low turnover of their portfolio securities.

While this is an advantage they share with other index funds, their tax efficiency is further enhanced because they do not have to sell securities to meet investor redemptions.

To read more about "storing" silver eagles in an IRA account. In terms of market exposure and diversification, an ETF can be an economical way to balance portfolios and to "equitize" cash by investing it quickly.

An index provides diversification across an entire index. An ETF, whether an index fund or actively managed, have transparent portfolios and are priced at frequent intervals throughout the trading day.

When you count the London and Switzerland ETFs, in addition to the Barclay's ETF, you get about 220 million ounces of silver in storage.

The SLV has been popular its inception coincided with a significant price move.

For the complete source, click here. For the first time in history, they enable institutional and retirement funds to easily buy and hold silver. Given silver’s unique dual role, as industrial commodity and investment asset, this was no small development.

The advent of the SLV had an important impact on the price of silver. In fact, the price of silver tripled after the SLV was proposed.

Of the many different common stock and other traded securities regulated by the US Securities and Exchange Commission (SEC), the three metal exchange traded funds are very unique and distinct from the rest.

Out of tens of thousands of different securities, only SLV, GLD, and IAU call for a rigid metal backing, 10 ounces of silver behind each share of SLV, one-tenth of an ounce of gold behind each share of either GLD or IAU. Investors buy shares of these funds because they are assured that this specific metal backing exists. Investors buy shares knowing that the sponsors and custodians guarantee the metal to be there.

So what's the downside?

Well, if you've been here before, you know that we recommend taking possession of the silver you own. The argument applies here.

Whether we like or not, the risk of major financial meltdown is alive and well. Its even selling advertising.

Are there problems with shorting in the SLV? How would they manifest?

One issue or problem is the matter of whether real silver backs up the assets of the trust, as claimed by Barclay's .

The SLV prospectus clearly dictates, that silver has to be deposited before any new shares are issued or allowed to be purchased.

Butler noticed a pattern of delay in depositing silver into the trust. In fact, as stated by Bulter,

"the pattern became so regular that I could tell, fairly precisely, when and how much silver would be deposited. I did this by observing the price and volume patterns in the trading of SLV shares."

In essence, in conflict with what the prospectus dictates, there have been regular periods when the trust did not have all the silver it should have.

Buyers of new shares could be issued those shares without new additional silver being deposited through the short selling of shares to the buyers of the new shares. Of all the tens of thousands of different common stock and other traded securities that are regulated by the US Securities and Exchange Commission (SEC), these three metal exchange traded funds are very unique and distinct from the rest. Out of tens of thousands of different securities, only SLV, GLD, and IAU call for a rigid metal backing, 10 ounces of silver behind each share of SLV, one-tenth of an ounce of gold behind each share of either GLD or IAU.

You buy shares of these ETFs because they are assured that this metal backing exists - that the sponsors and custodians guarantee the metal to be there. Or maybe not.. Short Selling SLV

On March 11, this reported short position hit almost 1 million shares, or nearly 10 million ounces - removing any doubt of the existence of short selling.

Around April 2008, Butler began to notice a more pronounced delay of silver deliveries into the SLV.

This was for much larger amounts of silver than previously observed.

In fact, the amount of short selling in SLV shares began to look extreme.

Again, as Butler points out, the real kicker is that all investors who purchase SLV shares must pay in full for their shares (or borrow from their brokers at sky-high margin interest rates).

Butler continues:

"Not only do the naked short sellers not have to deposit a dime for their short sales, nor deposit one ounce of real silver, they receive the full cash proceeds that the buyers put up and get to earn interest and deploy that cash until they buy back their short sales. Which may be never, as no one is pressuring them. This is a Wall Street scam and fleecing of the first order."

Why is this bullish for silver?

Though it casts a shadow on what we deem as a risky way to invest to silver anyway, there is a bullish side to this.

The main reason for anyone to naked short sell SLV is that the available silver needed to be purchased and put into the custodian’s vault doesn’t exist.

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Rather than go out and aggressively bid up the price of world silver, it is much easier (and natural) just to sell shares of SLV short.

No one would be the wiser and it keeps the price nice and orderly.

Finally, as Butler summarizes,

"But what is most disturbing of all is that, aside from the manipulation connection, the short selling in SLV shares represents something that was only expected to be realized in the future in COMEX silver - a delivery default.

If there is the equivalent of 25 to 50 millions of silver sold short in SLV (maybe less, but maybe more), that is equal of 5000 to 10,000 COMEX contracts.

If buyers stood for the delivery of 5000 to 10,000 contracts of COMEX silver, and the sellers failed to deliver within the required contract period of time, everyone would know that was a major default and it would result in the most serious (bullish) impact possible for the price of silver and the exchange."
What will happen to the Silver ETF when the price of silver surges? Its safe to say again, that taking delivery of any silver you buy is the only way to go. The silver ETF appears to carry similar risk to that purchased on the silver futures market.

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