New COMEX Rule: Another Reason to Fear The Silver Exchange Traded Fund

[silver exchange traded fund] Regardless of their expensive annual fees, frequent tracking errors, and the simple fact that you'll never be able to actually touch the gold or silver your ETF claims to hold, there are several more reasons the silver exchange traded fund should never be used by precious metals investors. An important rule change by COMEX, the American commodity exchange, allows silver exchange traded fund substitutes for precious metal delivery.

Paper as Metal

To address a temporary problem of liquidity, COMEX has systematically created an even bigger problem for investors. The exchange allows investors to make good on their futures positions with gold and silver ETFs rather than the real assets, thus opening up the door for hugely distorted market prices.

How it Works

Under the clause 104.36 in the COMEX rulebook, exchanges can take place on the exchange as long as the products meet certain criteria. After sorting through legalese, investors find that the criteria isn't as demanding as one would expect from a multi-trillion dollar exchange, but is actually quite loose. COMEX requires that exchanges be made in economically equal products. For instance, a 1000 ounce silver futures position can be used in the delivery of 1000 ounces of silver, despite their inherent differences.

This creates immense problems for investors, as well as the exchange itself. First, no silver actually trades hands, but only a silver derivative that has supposed claims to silver. Second, the silver exchange traded fund is economically similar in that it has equal worth to the same amount of silver; however, investors cannot receive physical delivery from the ETF issuer. In essence, purely derivative investments are equal to physical metals in the eyes of COMEX, even though the reality is quite different.

Further Complications

Reading from the prospectus of the two biggest gold and silver exchange-traded funds reveals that through the COMEX marketplace, paper can really be turned into gold! The popular SLV ETF discloses in its prospectus that there are times when the exchange-traded fund will hold cash, or cash equivalents, allowing itself the opportunity to issue more shares than the silver it actually holds in the trust.

In addition, the silver exchange traded fund has the ability to make claims against third parties (a derivative) to track the price of silver on the marketplace. This opens the door for large manipulation in the silver markets, as investment dollars in the ETF can be placed on derivative bets. Then the shares can be exchanged through COMEX to meet delivery on futures positions.

The result is that derivative products owned by SLV can easily find their way into what is supposed to be a purely physical market, allowing for the opportunity of an oversupply of silver compared to what is actually in existence in vaults.

What it Means for Investors

ETF investors are clearly at a disadvantage, although the chance of manipulation is only a bullish signal for physical investors. COMEX rules have allowed artificial inflation of the amount of silver futures available prices, and it is sure that physical metals will only gain in value as this comes to light. There is simply no better investment than physical metals both for the short and long term.

If you are new to silver or if you simply want to keep up with the story, try out our Free Guide and E-Course.

Click here for the Silver ETF basics.

Back to Silver Coins Home

The #1 Reason to Own Silver Now?

Feedback from readers...

"Silver Coin Investor is cutting edge and has it all...the value I receive from your website and The Lewis and Mariani Silver Letters is far, far greater than the small subscription cost. I am finding that I don't need any other source for silver research and knowledge. Thanks Jeff.

I mean that.

Vic (UK)

"I find any information I can learn about investing in silver interesting. Your website and e course have taught me a few things I didn’t know. You’ve provided some good reading and links about something I love as a hobby and my and my family’s future. Thank you"
Dennis - Mount Sterling, Kentucky

"I've been reading on silver on many sites, I find your information more practical and straightforward and full of content, thanks".
Xavier - Barcelona, ESP

"Your website and E-Course helped provide a different take on the metals".
Paul - Beckley, West Virginia

"I appreciate the educational aspects of your website/e-course. Your course has helped to reinforce my decision to purchase more silver".
Spencer R. - Loomis, California

"I appreciate your sharing your vast knowledge with those of us who are learning about the potential for silver investing".
Thomas - Peoria, Arizona

"I have a very busy schedule and your course updates keep me focused on the "silver strategy"
Bob M. - Kitchener, Ontario

"I've read your articles on Market Oracle and I appreciate the clarity in your writings. You confirm what I believe, that silver has a huge upside and if patient will pay off".
Ken - Littleton, Colorado

"Well it helps confirm my conviction that silver is far better metal to invest in than gold or any of the other metals because of its monetary, medical, and industrial uses. So it really has a realistic unrecognized potential that I feel the gold bugs overlook. I read and research a lot of different sources and you help me stay balanced in my approach. Thanks for the course and keep up the good work!"
Bill - Columbus, Ohio

"This course and website is slowly restoring my confidence as an investor in silver. At one point I was ready to unload it all at rock-bottom prices. Since I've read the letter I've held on.
Kim - Saint Thomas, Ontario

Thanks for making it all free and very simple.
Jim - Kingsland, Georgia

"The E-Course is very upbeat and has helped me to feel more confident about the future of Silver!" -
John J. - Harrisville, New Hampshire