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Silver ETF Set Up To Take Advantage of Higher Prices May Spell It's Slide.
MarketWatch today asks a very interesting and intriguing question: Will special Exchange Traded Funds designed to take advantage of Silver's rising price eventually be the catalyst for it's downward slide?
A highly anticipated exchange-traded fund tracking silver prices may usher in a correction from multidecade commodity highs if it follows the pattern of gold ETFs.
Although the silver ETF has yet to gain final regulatory clearance, precious-metal traders are eagerly awaiting the fund in registration from Barclays Global Investors. Some are speculating it could launch as early as this week on the American Stock Exchange after silver prices reached a 22-year high of $11.815 an ounce Monday.
Analysts, though, say the introduction of the silver ETF could actually set up a price pullback in the days and weeks following the start of trading.
The introduction of commodity-oriented ETFs quite often occurs at market tops.
There are already seven ETF-like products listed on exchanges in the U.S., the U.K., Australia and South Africa that track gold prices, and the launches have been marked by an interesting trend, according to J.P. Morgan analyst Anindya Mohinta in London.
The most successful gold ETF launches were Gold Bullion Securities (GBS) on the London Stock Exchange in December 2003, and StreetTracks Gold Trust (GLD ).
Mohinta found gold prices rose by up to 12% in the 90-day periods leading up to the ETF launch dates, only to fall between 7% and 10% in the corresponding period after the listing date.
So far in 2006, through Monday's close, silver futures are up more than 32%, fueled in part by the ETF talk.
If approved by regulators, the silver ETF would be backed by silver held in a vault, which matches the set-up of existing gold ETFs. Barclays has filed to issue 13 million shares of the silver ETF, with each share representing 10 ounces of the metal. This requires a physical backing of 130 million ounces of silver, or 12% of the global physical demand and equal to the silver inventory on the New York Mercantile Exchange, according to J.P. Morgan.
Mohinta said he doubts that the entire 13 million-share allocation will immediately sell out, pointing to the common practice of using mining stocks such as Pan American Silver Corp. (PAAS )
PAAS25.61, +0.61, +2.4% ) to get exposure to silver without holding the physical metal.
"Larger, more sophisticated players already have an abundance of investment alternatives" such as futures and options contracts to invest in silver and other commodities, noted Tim Evans, senior analyst at IFR Markets in New York.
Precious-metals prices are also notoriously volatile and given to wide performance swings.
Evans said the rush of commodity ETFs such as the silver fund does have a tendency to trigger euphoria, but "their introduction quite often occurs at market tops, bringing small investors into markets they don't fully understand at just the wrong moment."
"While silver can get to $15 or $20 before it's all said and done, the actual launching of the silver ETF could mark a short-term top for silver," added Peter Grandich, editor of the Grandich Letter, noting that the silver ETF could represent a "buy the rumor, sell the news" trade.
Analysts are also warning about potential confusion over the tax structure of precious-metals ETFs. Under current tax law, long-term gains from the sale of silver are taxed as "collectibles" like artwork. Therefore, if held for more than a year, gains on the silver ETF would be taxed at a maximum rate of 28%, compared with 15% for so-called long-term gains on stocks. If sold in less than a year, gains are taxed as ordinary income.
Check out this Siver Exchange Traded Fund carefully before you invest.
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