Exchange Traded Funds are a popular investment vehicle for mainline investors these days. They represent a convenient way to participate in a given class of investments, which resembles a mutual fund in a number of ways. However, the fund trades more like a stock and doesn't have all of the drawbacks mutual fund investors routinely complain about.
In the world of precious metals investing, there are indeed ETFs available. While some vehicles may track a cluster of companies, such as junior mining companies, for example, others will track underlying commodities such as natural gas, uranium, or precious metals. Two of the more popular vehicles are GLD for gold investing and SLV for silver investing. As for the latter ETF, silver investors find this appealing because it is a way to "play" the silver bull run with ease. Think about it this way. With just this one ETF, silver is now a portion of your portfolio and you've avoided all the mutual fund pitfalls.
Moreover, there's greater allure still. With the SLV ETF, silver can convey profits to you without you even knowing the name of a single mining company that produces an ounce of silver! You may not even know what the spot price of silver is. And you may not have the foggiest idea where you'd even buy physical silver apart from your neighborhood jewelry store.
This all sounds great. However, as they say, all that glitters is not gold. And it may not be silver either. From my perspective, when you invest in the SLV ETF, silver may not really be in your portfolio after all. For starters, you obviously do not have physical silver; you have a digital entry in your online brokerage account. "Big deal," you say, "so it is with all of my holdings." Fair enough. So, let me ask you a question. If you go the route of ETF silver investing, what exactly do you have?
Here's the problem as I see it. Frankly, the silver market is extremely tiny. It's estimated that only about 600,000,000 ounces of silver are produced annually. That may sound like a lot, but I want you to consider two important points.
On the one hand, note that the vast majority of production is consumed by industry, since silver is an integral part of everything from dentistry to electronics and beyond. When all is said and done, there might be 100 million ounces left for investors. That means that, if everyone in the United States wanted a 1-ounce silver round this year, only 1 out of every three people would even get one. A full two-thirds of us couldn't even get our hands on one stinking coin! Are you starting to see the picture?
Now, on the other hand, let's look at it in hard numbers. At $20 an ounce, even a generous 100 million ounce allotment for annual silver investment would put the silver market (for investment purposes) at 2 billion dollars. At $30 an ounce, we're at $3 billion. And even $50 an ounce for silver would make the silver investment market just $5 billion. That's really small.
I hope you can now appreciate just how minuscule, in relative terms, the investment market for physical silver really is. Now, we can go on from there to ponder a few things. A for the SLV ETF, silver is supposed to be a core holding, right? In other words, SLV is designed to track physical silver prices. So, as for any real, tangible assets that might exist in the SLV ETF, silver should be high among them. However, we can know definitively that the SLV is not gobbling up all available investment silver. After all, I have some of it!
So how much of the generously estimated 100 million ounces each year is SLV adding to its reserves? How does that figure compare to the market cap of the SLV? See the problem? When there is movement in this ETF, silver is supposedly the driving force. But how can SLV justifiably rise in concert with physical silver if there is not enough physical silver to back it? How is ETF silver investing any different from the fractional reserve fraud of the fiat money system the Federal Reserve operates, which has led to the massive decline in purchasing power of the "dollar?" What would happen if everyone in SLV started to demand redemption and wanted the real thing instead? Isn't this why the Federal Reserve no longer issues Silver Certificates?
ETF silver investing reminds me of a game I used to play as a child. What was it called? Oh, yeah: Musical chairs.
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investing, and how to not get left standing? J. Scott Talbert is an Estate & Financial Planning attorney and precious metals investing aficionado. Visit his Resource Investing website at http://www.miningstockdepot.com
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