Launch of Silver iShare in Doubt

November 07, 2005

The Silver User’s Association lobbies hard against the proposed silver ETF, claiming it would drive up prices and cost America jobs.

The Silver User's Association (SUA) - an industrial lobbying group made up of companies that use silver in their operations - has launched an all-out lobbying campaign to block Barclays Global Investors (BGI) from launching a silver bullion exchange-traded fund (ETF).

Why?  Because it would be too good an investment.

According to the SUA, the market for physical silver is so tight that an ETF would tip the balance of availability, sending the price skyward.  That would hurt its members, which use large quantities of silver in their daily operations.

"[T]he ETF most likely would cause a shortage of silver in the marketplace," the company wrote in a recent position paper. "This removal of large quantities of physical silver could have a negative impact on silver-industry specific employment as well as the overall economy, both through job losses and inflation."

In other words, there'd be a big bull market in silver - and a bear market in the economy.

Curiously, that's the same argument that's been made by silver bulls for years.  Ted Butler, a leading silver analyst and founder of Butler Research, wrote some of the initial stories on the SUA's opposition to the ETF. ().  And he finds its incredibly telling that the SUA has embraced the silver story.

"They are telling you there is not enough real silver in the world to fund a silver ETF," Butler wrote in a recent commentary.  "They are telling you that the silver ETF will create a shortage and send the price soaring…Up until this ETF article, I have never heard them say anything bullish about silver."

The basic goal of the SUA is to keep silver prices low. Founded in 1947, the organization's roster includes a number of powerful industrial companies, including Dupont, Dow Chemical and Eastman Kodak.  Other members include Tiffany and Bank of America, which has a large silver futures trading operation. The group is reviled by silver investors, who believe it plays a large role in keeping silver prices artificially low.

Not surprisingly, the prospectus for BGI's ETF concurs with both the SUA and silver bulls about the silver situation, noting that the world suffers a significant silver production shortage: more silver is consumed each year than is created through mining and recycling.  Recently, governments have made up this production gap by selling silver from vaults, but many analysts believe that government stores are getting low.

The SUA says that it supports the idea of investing in silver - to do otherwise would border on the illegal. But they believe that the current systems, which rely largely on futures contracts, are more efficient and effective than the purchase of physical bullion.  Those arguments make the silver bulls crazy, as they believe that the price of silver is kept artificially low through huge short positions. 

Ultimately, Butler and others think that the SUA will win, and that BGI will be forced to withdraw its silver application.

Nothing that the prospectus calls for a $1 billion offering, equal to 130 million ounces of silver, Butler writes:  "I don't know what the Barclays people are smoking to suggest that they could buy 130 million ounces of silver at anywhere near current prices. 130 million ounces … just about equals the total known world silver bullion inventory."

Of course, there's no guarantee that the ETF would have to purchase $1 billion in silver.  The prospectus calls for the fund to initially purchase just 1.5 million ounces of silver, or about $10 million in silver.  That initial purchase would be too small to impact the silver markets. Price and liquidity would only become a problem if investors piled onto the offering.  And with all sides pointing to the huge silver shortage, who knows … I might pile on too.

As far as I know, the SEC has never turned down a filing because it represented too good an investment. But it's certain to look at liquidity, and at the ability of the fund to purchase large quantities of silver as new money roles in.  Silver speculators have long faced troubles and delays in getting silver delivered following the expiration of futures contract. If those same delays and troubles apply to the ETF - or if they get worse with the increased demand - that could be a problem.

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