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JULY
24 2008 11:05PM - Au/ag were slapped silly
today by a mild rise in the dollar and pretty much any
other reason you or I could think of. In the end, however,
the monetary metals recovered as the stock markets
drove over the edge of another cliff and Iran said "nah"
to the international nuke inspectors. Au/ag prices are
currently in no-man's land with the technicals saying
we haven't reached a final bottom but geopolitics and
market sentiment beg to differ. If I had to guess, I'd
say prices will go up first, then down, then up,
then down. Up first because the Euro has just broken
above some technical peaks and so for now the direction
in au/ag are also up. Of course, that's useless
information unless we know by how much.
For
the first time in a while, we saw something encouraging
in the PM shares today as Kinross agreed to buy Aurelian
in a C$1.2 billion all-stock deal.
I'm a bit surprised by this given that Aurelian's world-class
Fruta del Norte gold deposit is still an inferred resource,
and it's in Ecuador. The same Ecuador that a couple
of months ago suspended all exploration activities in
the country while the government legislates a new mining
law. Nobody knows exactly what the law will look like
in the end, what the tax rates will be, or what types
of restrictions will be placed on mining activity. Yet
Kinross decided to say, "to heck with all the typical
senior gold company caution." I saw bully for them,
and hopefully this also means bully for the better PM
juniors.
JULY
23 2008 5:30PM - My mouth is agape reading
the mortgage rescue bill that is about to be voted into
law by Congress as I realize that the U.S. mortgage
industry has just been effectively nationalized. At
the same time, the national debt ceiling is being
raised by 'only' $800 billion to a mind-boggling $10.8
trillion. My suspicion is they will need much more before
it's over. Against this backdrop, gold and silver are
being pushed around as if financial Armageddon didn't
just knock on the door. The Euro may be overvalued and
the Eurozone might be having their own problems, but
what just happened here with the rescue of Freddie Mac
and Fannie Mae is virtually guaranteed to send the U.S.
dollar to new lows perhaps as far as 50 or below on
the dollar index. This piece of legislation is the new
elephant in the room and will likely be the major driver
for gold and silver prices in the medium term.
JULY
23 2008 12:30PM - I've been watching market
depth during the current au/ag fallout and buyers
are AWAL. They appear to have been scared away as gold
dropped below $950 yesterday and couldn't seem to climb
back above that level by this morning. Fed by a
rally in the dollar and a decline in commodities and crude
oil, we saw the typical but disappointing 'waterfall'
action continue throughout the trading day and into
the afterhours. There isn't much in the way of downside
support until $16.50 silver and $850 gold but I expect
prices to bounce somewhere north of those numbers before
finally bottoming somewhere around there in the next
couple of weeks. As such, I continue to probe for a
good place to get long. Too bad silver couldn't make
use of its relative advantages compared to gold
as I've discussed in the past few days. Maybe someday
there will be enough strong-handed investment demand
to take advantage of such opportunities. Perhaps by
then there will be a 'wholesale shortage' -- in London
and other places -- of silver bullion as well. But clearly
not yet.
A
brief note on the "Commentary" section of
the home page. I'm slowly going through all of the recent
articles that I've flagged over the past few weeks and
will be adding them as I run across those I find relevant
to silver and PMs. I'm putting the most-recently added
articles at the top and that's why the dates are all
jumbled up. I would urge my readers to look over this
section from time to time to make sure they haven't
missed the best articles on the PM market that the web
has to offer (according to me of course).
JULY
22 2008 4:55PM - Central Fund of Canada has
just added over 3 million ounces of silver to its holdings
and the London ETF, PHAG, finally added almost a million
ounces after months of acting comatose. Meanwhile, the
Swiss ETF ZKB keeps plugging along with an addition
of about 0.5 million ounces last week. I expect the
iShares ETF, SLV, to make a big showing in the days
ahead as well. Perhaps it will be substantial enough
to put the question of a silver shortage in London to
rest. I note that the SLV's 10-for-1 share split (and
hopefully improved NAV premium/discount reporting) goes
into effect tomorrow. In any case, the silver stockpiles
that I track on the home page of this website show a
total accumulation of 415 million ounces of silver as
of today. This is a strong testament to the substantial
investment demand that is out there, which is no doubt
a multiple of the visible stockpile.
A
reader has made a valuable suggestion with respect to
these silver inventories. He pointed out that perhaps
some of you might be aware of other publicly-available
information on silver holdings by investment funds or
entities that I have not included in the 'Silver Alerts'
table. He gave the example of a certain mutual fund,
although that fund appears to hold its silver at a COMEX
warehouse (and therefore including these holdings would
be double-counting). If you do know of any verifiable
sources, please let me know especially if the amount
is over 1 million ounces. For now, I am already planning
to add the mintage figures of the silver Eagles produced
by the U.S. Mint since it is highly likely that
99% or more of these coins are still in the possession
of investors and collectors. And while it may be true
that some of these will never be sold near melt
value due to numismatic considerations, it is equally
possible that silver will one day reach such a high price
that the numismatic value all but disappears.
Before
you say 'no way', let me point out that the supply of
Morgan silver dollars took a huge hit in 1979-1980
as a result of the millions of these collectible coins
that were melted down. Morgan dollars basically
traded in 1980 as bullion except for a few rare exceptions,
and I expect the silver Eagles will do the same at some
point--probably even low mintage years like 1996. In
fact, one possible sign of a top in the silver market
might be when even the more collectible silver Eagles
trade at melt value (1996 and proofs included). Obviously,
we are not there right now but it should be instructive
for you to learn that the numismatic premium has
already disappeared for most silver Eagle dates
including the once "rare" 1986 and 1990. Indeed,
back in 2003 you could have bought the 1986 silver Eagle
for around $16 per coin at its cheapest (with silver
trading around $5-6 per ounce). Today, you can have
it for $22-23 on ebay with the dreadful result being
that silver has appreciated in melt value by 300% while the
1986 silver Eagle has only gone up by 50%. The 1996
silver Eagle has done a bit better by doubling in price.
The valuable lesson, often taught but rarely demonstrated
like I've just done, is that you shouldn't pay
much more than melt value for silver acquired for
investment purposes.
Enough
about silver, let's talk gold for a minute. I don't
usually discuss gold inventories because the declared
stockpiles of gold are so large (if you believe government
figures about how much they hold), but an interesting
thing just happened today at the COMEX warehouses
that does warrant some attention. For the first time
since early 2007 (and who knows how far back before
that), the amount of COMEX warehouse gold has exceeded
8 million ounces today. We do have deliveries under
the August contract coming up in a couple of weeks and
a huge open interest in COMEX gold futures, so the increase
itself is not very unusual. Still, the size of the addition
and the overall COMEX holdings do jump out. To me, this
speaks of a possible distribution phase with selling
pressure appearing in August, which I believe supports
my theorizing a couple days ago about the huge
open interest in Sept. 100 GLD call options. Basically,
I view these as troubling developments that may be setting
gold up for a substantial fall regardless of fundamentals
or technicals. Of course, if we get something like Fannie
Mae and Freddie Mac being nationalized or Iran being
attacked by Israel, all bets are off. Short of some
massive systemic shock, however, gold may have some
work to do in overcoming these headwinds starting early
August and lasting perhaps a couple of months. Unless
silver gains too much sympathy for falling commodities,
we could even see it outperform gold on a price decline
for the first time in history.
Flipping back
to SLV, I'm surprised to see Howard Ruff, veteran investment
advisor, buying the theory hook, line and sinker that
SLV is 'naked short'. He is recommending that all of
his flock get out of SLV and GLD gradually over time,
presumably because he believes these ETFs are running
the risk of default. I hope this type of incorrect-though-influential thinking
does not continue to catch on because should SLV or
GLD lose popularity, I can guarantee you that au/ag
prices will get punished really hard. Fortunately, most
of the SLV and GLD shareholders are unlikely to be swayed
by the errant logic of 'naked shorting'. As I've said
many times before, there are plenty of reasons not to
invest in gold or silver ETFs, but the idea that they
don't hold the bullion they claim to hold or that shares
are being sold 'naked short' in huge numbers, is 100%
wrong.
Unfortunately,
the backlash against short selling is increasing with
the ridiculous, selective 'defense' by the SEC
last week of the U.S. financial industry's giants. Thanks
to this encouragement, my mailbox is now overflowing
with messages from 'anti-shorting' crusaders. Meanwhile,
Ted Butler continues to waste valuable space, this
time arguing that all shorting of stocks should stop.
If he would just get off the dead-end road, there is
no telling how much value his relentless efforts could
provide to silver investors.
Here
is the thing. The short selling issue is irrelevant
for 99% of stocks, including the vast majority of juniors
trading in Canada. It has been a factor with respect
to a few companies that are the legitimate victims of
boiling room operations, although most deserved having
their prices pushed lower (because they were outright
frauds or pump-and-dump operations). Indeed, I'm aware
of several PM stocks right now that short
sellers would absolutely love yet I see no evidence
their shares are being shorted to any great extent.
I do see one problem with short selling, and that
is when it comes to large restricted share issuances
and convertible debentures that can be repriced--so
called 'death spiral financings'. Some participants
in a financing may simply be going for arbitrage
profits and as a result they may short sell (in a few
cases even 'naked' short sell) in the open market against
their long position obtained in the financing. These
are case-by-case issues that the SEC and Canadian regulators
should deal with--as they have in the past--using
enforcement actions available under existing securities
laws.
The
ultimate proof that short selling, whether 'naked' or
otherwise, is nowhere near as widespread as alleged
is the fact that it is rarely profitable on
a portfolio basis for even the smartest hedge funds. Most
industry players realized a long time ago that betting
on falling stock prices is done best, if ever, using put
options, written call options, single-stock futures,
or sector plays. Perhaps the 'anti-shorting' crusaders,
if not the SEC too, will realize this eventually.
JULY
22 2008 10:25AM - That attempt at $1,000
by gold didn't last very long as it got cut a bit
short by the commodities getting hammered today.
Nonetheless it provided a clear opportunity for taking
profits. As we speak, gold is struggling to stay above
its support level and silver is grappling with the round
number trading at $18. I'm currently bottom-fishing
with very tight stops.
Looks
like my corn option trade was late. In the past couple
of days, corn has sunk below $6 with not much in
the way of support all the way down to $4. I wish I
had added more $6 puts or had additional time to buy
some of the other options I mentioned last week, but
at this point they've gotten way too expensive given
the risk-reward spread. I still think there will be
a big bounce in the days ahead and I'm actually using
some of my profits on the $6 puts to buy some calls.
I will then hopefully use the profits on the calls to
buy more puts for the next downleg.
As
for copper, it continues to provide an excellent opportunity
to risk a tiny amount to make a huge payday in case
the red metal finally succumbs to a correction in commodities.
Copper may look very strong now with unassailable fundamentals,
but if the facade cracks, we could see a bunch of limit-down
days that quickly take a dollar or two off the price.
It's easy to be put off by the tiny volumes in copper
options, but if you put in a reasonable bid, you will
get filled most of the time. This doesn't mean
you can get an order for 100 options filled, so this
trade is purely for smaller accounts and not hedge funds,
which is just fine by me. I offer up the December
2008 COMEX copper $2.50 put option, which can be had
for $200 and under, against any other speculative trade
for 2008 (disclosure: I own quite a few and plan to
add some more, rolling out to 2009 put options if December
approaches expiration without much underlying movement).
In fact, I think this trade is so good that I wouldn't
feel bad charging $1,000 to reveal it--if I already
had a subscription service. Perhaps this will make me
hurry up and get it started, plus if it turns out as
well as I think it could, some people might actually
take me up on the next offer.
JULY
20 2008 10:35PM - If you think silver has
succumbed to gravity, I say not so fast. As long as
gold is able to hang around the $950 level, things are
okay. So far gold is holding but who knows what the
next hour holds.
Here
is one worrying sign. More than one reader has pointed
out to me that open interest in the Sept. 100 GLD (the
big Gold ETF) call options has grown to a huge
size. This appears to be a rather large
bet that gold will go over $1,000 by September considering
that options on GLD were introduced only one month ago.
165,000 option contracts represent more than 1.5 million
ounces of gold, which is more than 5% of the GLD outstanding
shares. By comparison, the nearest option month for
COMEX gold is October, and there are about 7,000 of
the $1000 strike call options outstanding, for a total
of 700,000 ounces. This is less than 2% of the outstanding
COMEX futures. Also, 1.5 million ounces is about half
of what GLD has added in the past couple of months.
Moreover, the premium on the Sept. GLD call options
is significantly lower than the premium on the Oct.
COMEX gold call options, which expire at about the same
time. That is not the case for the put options, where
the premium on GLD is much higher. Thus, it appears
that the large volume of these Sept. 100 GLD call options
may have resulted not from huge demand but rather huge supply.
In effect, the GLD Sept. 100 call options are being offered
at a price that is too sweet to pass up.
Now,
who would offer these GLD call options so cheap? Well,
I don't think it takes a rocket scientist to draw the
conclusion that these people are one and the same who
acquired some of the GLD shares that resulted in the
ETF adding 3 million ounces to the gold Trust in the
past few weeks. In other words, somebody bought a bunch
of GLD shares and then wrote call options against them.
The GLD purchase appears to have been done mostly under
90 and therefore the call option strike price plus premium
represents an income of more than 10% if the calls expire
in the money and are exercised. Otherwise, the option
writers get to keep the premium which lowers their cost
basis in the GLD shares.
If
you've followed Professor Fekete's writings, you should
recognize at this point that we may have the confirmed
arrival of "bulls in bears' skin" (BIBS for
short) in GLD just one month after options were introduced.
What these BIBS seem to be doing can be boiled
down to the following. They buy a bunch of GLD shares,
driving up demand and causing more gold to be delivered
to the gold Trust, which in turn causes gold prices
to rise. As a result of rising gold prices, there is
growing speculative interest in GLD and the BIBS sell
call options in huge numbers (the BIBS are probably
bullion banks and Authorized Participants, and many
of the buyers are no doubt their own clients). Money
that might have otherwise gone into GLD itself has instead
gone into GLD call options, and because the BIBS have
now lifted their own buying, the net result is
a possible decline in GLD (and gold) demand. This,
in turn, could very well ensure that GLD does not rise
above 100, allowing the BIBS to keep the option premium.
If GLD does rise above 100 by option expiration, the
BIBS aren't concerned because they're still up more
than 10% in a couple of months and they get to repeat
the process again. This is what the Professor means
by 'earning an income' on gold, although this version
appears both more brazen and accessible to the average
investor than do most of the other methods. The telltale
sign that this was overdone the first time around is
the premium on the GLD call option being lower than
the premium on the COMEX gold call option, not just
in the Sept. 100 calls but across the board in calls.
We
should know if I'm wrong that the BIBS are involved
here because assuming GLD does close above 100 at option
expiration, the resulting demand for GLD shares should
drive a lot of new gold into the Trust, perhaps over
1 million ounces. I'm guessing that won't happen because
those 1 million ounces have already been added before
the fact.
The
above theory also explains something that is a bit of
a mystery with respect to SLV, the iShares silver
ETF. Some silver analysts have had free reign in speculating
that perhaps the lack of silver additions to SLV in
contrast to the big additions of gold to GLD is the
result of 'naked' short selling of SLV shares by the
Authorized Participants. To my mind, that type of thinking
is simply not very logical in light of the possible
effect of the new GLD option trading that has created the
very large open interest and low call premiums in the
GLD Sept. 100 calls.
So
what's this all mean? Well, it's possible that some
of gold's (and thus silver's) strength in the past month
has been the result of the accumulation of gold by BIBS
for their new "line of business" (selling
GLD call options) and not fundamental or technical reasons.
With this gold buying removed from the equation going
forward, we may see the price of gold (more so than
silver) drop for unexplainable reasons. I see two
takeaways. One, we can't be too confident about gold
holding $950 in the days and weeks ahead. Two, silver
may very well turn out to be the better bet for the
next little while even if prices drop. In other words,
silver typically falls faster and more than gold but
it might not be the case this time around.
Even
though gold may fail to hold $950 in the near future,
I'm personally betting that in fact it will first make
another run at $1,000. The way I see it is that
crude oil may try another stab at $150, sparking new
but temporary momentum in the commodities and au/ag.
I'm inclined to start taking some trading profits if
that happens, although I will be looking to jump back
in if some fundamental or technical reasons warrant
doing so. Along the way, I would also be looking to
increase my copper and corn put option holdings.
Time
to move on. Last week I discussed that the SEC's
emergency order against 'naked' short selling in certain
financial stocks is really nothing more than a protection
racket resulting in less liquidity and a worse-off market.
Well, here comes confirmation via TradeStation and other
brokers, many of whom are now refusing to allow 'retail'
short sales of any kind (even if the shares are located
and borrowed before the short sale). The TradeStation
notice sums it up nastily:
Due to the industry impact of the recent SEC emergency order on short
selling, TradeStation Securities will not be able to facilitate retail short
sales that are cleared through TradeStation Securities in the following
securities beginning 12:00:01 a.m. on Monday, July 21, 2008, and ending 11:59:59
p.m. on Tuesday, July 29, 2008.
It
then goes on to list the companies (Bank of America,
Morgan Stanley, Goldman Sachs, Citigroup, Freddie Mac,
Fannie Mae, etc., etc.) that have been operated
in such a way that they are both the most critical to
the U.S. and world economy and at the same time the
most vulnerable to unsubstantiated rumors. Simply amazing!
JULY
17 2008 9:15PM - The support levels mentioned
yesterday are being tested as I write this and so far
au/ag are holding up. Crude oil got pummeled again
today and many recent superstar commodities such as
corn are also on the ropes. The commodity indexes are
either sitting right at trendline (Continuous CRB) or
have already broken down (GSCI). If this is the start
of a long-needed correction, it presents some temporary
problems for the monetary metals. Fortunately, they
are in remarkably good shape to deal with any fallout.
But just in case, I'm going to protect my substantial
long exposure with a slightly different strategy
than I've discussed before. This strategy is consistent
with my recent rantings about a possible correction
in commodities. In short, I am buying put options in
corn and copper, two commodities that are bellwethers
in many ways. Both have made some of the most spectacular
moves out of all the exchange-traded commodities during
this bull market and both continue to be supported by
a very bullish consensus. That makes their put
options relatively cheap and also means that
a shift in sentiment could cause their prices to fall
. . . by a lot (fundamentals be damned).
Copper
in particular has some very attractive put options all
along the option chain (Sept @ $3.00 - $3.30, Dec @
$2.80 - $2.50, Mar 2009 @ $2.50, etc.) I especially
like the Dec $2.50 put currently trading under $200
because it offers extreme leverage should copper fall
by a similar amount from its peak (60%) as have
lead, zinc and nickel. At $2.00 copper, each option
would be worth $12,500. At what I think might be the
eventual low of $1.60, each option would be worth over
$20,000 for a legendary 100-to-1 gain. The likelihood
of this happening by late November (when the December
put options expire) isn't very good, however, even
if commodity prices crash and burn, so my strategy involves
buying some $2.50 put options into Mar 2009. If
copper doesn't end up crashing by the time these put
options expire, that probably means gold and silver
will be much higher and the losses on these options
will have served their purpose as portfolio insurance.
In a best case scenario (for this strategy), copper
crashes while gold and silver go up (and I can probably
retire).
Corn
is a bit tougher in that it has already come down by
almost 20% from its peak, but there are still some attractive
put options out there. The $5.50 put option, for example,
seems to be a pretty good bet from Dec 2008 all
the way out to May 2009. On a move down in corn prices
to $4.00, which is not at all implausible, these puts
would be worth around $7,500 each. The $4.50 puts are
cheaper but not a bad way to gamble on lower prices;
I'd consider buying them all the way out to Dec 2009.
Also, I already own some $6.00 puts acquired while corn
was still near its peak, and should there be the inevitable
bounce in the weeks ahead, that would be where
I might look to add more positions.
Let
me emphasize here that the above put options are all
high risk contrarian plays that should involve only
risk capital. In my own case, I am essentially using
them to hedge my long exposure in gold and silver against
a precipitous decline in commodity prices. If some of
these put options should expire worthless, I would look
to replace them with further out options until I see
evidence that a global economic slowdown similar to
what occurred between 1974-76 will not now do the same
thing, or worse, to the price of copper
and corn
that it did back then.
JULY
16 2008 4:05PM - Gold and silver broke out
from the upper end of their trading ranges late last
week and it was off to the races. The reason was that
the financial system took several body blows. First,
there was the emergence of new concerns about Freddie
Mac and Fannie Mae, which led the FED to extend to them
the same borrowing terms available to banks and Wall
Street securities firms. This will no doubt result in
another round of severe deterioration of the Fed's balance
sheet. These mortgage-lending heavyweights will also
continue to make news in the months ahead as loan defaults
continue to eat away at their capital, and this will
provide strong moral support for gold and silver along
the way.
Then
there was the failure of IndyMac Bank, the third (measured
by FDIC-insured deposits) or second (savings and
loan) largest in U.S. history. This past Monday, depositors
actually lined
up at the doors of bank branches hoping to
withdraw funds in a scene reminiscent of the Great Depression
(or more recently, the Northern Rock failure in the
U.K.) It is interesting to note that the failure of
IndyMac was actually the result of accelerating deposit
withdrawals in the past few weeks as realization of
the bank's troubles spread. Thus, we now have the first
confirmed case of a bank run in the current credit crisis,
replete with customers saying they are seriously considering
stuffing their money under a mattress or burying it
in the back yard. It's only a matter of time before
some of these people discover gold and silver.
As
if all this wasn't enough, the SEC just issued an emergency
order that allegedly seeks to protect investors,
but is nothing more than yet another sign that the banking
industry is in grave danger. The SEC order requires
that shares of certain stocks comprising many of the
world's 'money center' banks and credit-issuing entities
(Freddie Mac and Fannie Mae included) must be borrowed
before they can be shorted. This eliminates
the possibility of 'naked' short selling whether it
is done manipulatively or by market makers who are conducting
legitimate operations that have been encouraged by market
regulators for decades. Unfortunately, increased price
volatility could be an unintended consequence of
this SEC intervention given that it now discourages
market making activity. So, why issue the order? Apparently
the SEC fears that false rumors may be responsible
for damaging the credibility of major financial
institutions that rely on the trust of counterparties.
The SEC even trots out Bear Stearns as an example,
insinuating that its failure was the direct result of
false rumors about its dire financial position. Whether
true or not, we should not lose sight of the fact that
the companies listed in the emergency order probably
represent (1) institutions deemed 'too big to fail'
and (2) institutions that can presumably fail based
on some unsubstantiated rumors about their financial
condition. It's a sad but insightful fact that our biggest,
supposedly safest, and most critical institutions have
been structured in such an irresponsible manner that
they need SEC protection against rumor mongering to
keep them safe from ruin.
The
above three events are currently serving as major drivers
for au/ag and they go a long way to explaining last
week's breakout from the trading range established in
March. Had oil not weakened yesterday and the dollar
correspondingly not found its legs, we could have
easily witnessed gold climbing back above $1000 and
silver over $20 today. That would have left both au/ag
in a position to quickly achieve new highs before momentum
started to dry up. So, what's next? I wouldn't be surprised
to see the former resistance at $18.50 silver and $950
gold get tested a few times as support. If these levels
hold relatively firm, the upward trajectory could continue
with renewed vigor. Failure, on the other hand, would
somewhat invalidate the breakout and suggest that we
are still in a bottom-forming process that may involve
further visits to the respective 200 day moving averages
(now at $16.50 for silver and almost $880 for gold,
and still rising fast). In any case, the renewed distress
in the banking and credit sectors should serve to support
au/ag prices even if oil and the commodity sector experience
a major correction as I discussed in past commentaries.
Thus, we may be one step closer to the perfect setup
wherein au/ag become the biggest beneficiaries of anti-dollar,
anti-stock and anti-bond money flows. In such an environment,
we can expect the true gold and silver producers
and explorers to eventually shine as investors
start to view their relative risk in a better light
thanks to the great demand for what these companies (hope
to) produce.
Now
for a quick update on the basis and some other fundamentals.
The basis in gold and silver actually remains in relative
neutral territory on this latest move. There is absolutely
no indication of a move toward backwardation and
thus we must assume that monetary demand is still far
off. In addition, both the gold and silver
basis are nearly identical according to several measures
that I calculate, providing no indication of investment
preference (instead suggesting a 50-50 split).
If I had to generalize, I'd say the basis is telling
us (1) there is approximate balance between upside potential
and downside risk in au/ag, (2) current price action
is mostly technical and (3) physical supply for the
most part is keeping up with fundamental demand.
Number three, of course, argues against a shortage of
silver in London or elsewhere (I note that even silver
Eagles are back in stock at most bullion dealers0.
Moving
on, let's take a look at the silver ETFs. The iShares
SLV has finally added 3 million ounces in the past few
days to reach the 197 million ounce level it had achieved
a month ago today. By my reckoning, it took the Authorized
Participants (the brokers who can exchange physical
silver for ETF shares) quite a while to absorb sufficient
excess demand to warrant these additions. Some of you
may be wondering about where all that SLV trading volume
has gone. My answer is that trading volume figures in
SLV are deceptive in that much of it in the recent
past has occurred right around par to the iShares'
NAV. This means that the Authorized Participants who
normally bridge the gap between the price of SLV and
the cash price of silver have not had a lot of work
to do. Possible reasons for this include (1) the increased
liquidity of SLV as the number of shares outstanding
continues to increase and (2) greater competition
from market participants acting as secondary market
makers whenever a premium or discount to NAV appears.
These secondary market makers probably include brokers
as well as do-it-yourself traders who view the risk
of a persistent premium or discount as remote. In effect,
these traders are anticipating the corrective action
of the Authorized Participants, which makes such action
unnecessary. I would note that the recent proposal by
Barclays to split the silver iShares 10-for-1 should
increase liquidity even further as well as encourage
smaller investors who are put off by the 'high' price
of an individual share. The net result will probably
be even greater pricing efficiency.
There
is another possible reason for this split, although
it is pure speculation on my part. By splitting the
shares 10-for-1, each iShare will be priced roughly
the same as one ounce of silver. This will permit a
more straightforward and timely calculation of differences
between the price of SLV and the cash price of silver
(premium or discount to NAV). As it stands now, individual
investors and even small firms are at a significant
disadvantage in making this calculation compared to
large trading desks. By contrast, GLD publishes NAV
premium and discount indicators on its website with
a very reasonable 5-10 second delay (see "Current
Indicative Intraday Value of GLD" here).
Meanwhile, the SLV website
publishes a NAV figure using the daily London silver
fixing, which occurs sometime after 12 noon London time.
As such, we have a once-a-day "indicative
value" for SLV but we don't even know the exact
time that such value was calculated (the silver
fixing can occur right at 12 noon or several minutes
-- sometimes even hours -- afterwards, depending
on how long it takes to balance buy and sell orders).
Furthermore, the explanation of 'timing discrepancies"
in the NAV calculation as provided by Barclays is not
helpful whatsoever because it makes several inaccurate
or confusing statements. I recently asked Barclays to
look into this, and it is plausible that their review
resulted in a decision to revamp their entire approach
to calculating and reporting NAV, and part of that
decision may have been to split the shares. Again,
this is just speculation on my part but I hope Barclays
does improve the timeliness and relevance of its NAV
calculations as part of this share split.
Here
is my explanation of the current NAV calculation
that I provided to Barclays and what I believe may have
prompted them to consider the change. If you
can tell the difference between what I'm saying
below and what is stated on the Barclays website, you
are probably among a select few who truly understand
the workings of the silver ETF:
The
NAV calculation is made by the iShares Silver Trust
accountants at the end of each trading session using
the London morning price of silver. The London silver
price is fixed shortly after 12 noon GMT but usually
before the iShares open for trading on the AMEX.
The
Market Price of the iShares is calculated as of the
close of trading at 4pm EST
Premium/Discount
is the difference between NAV and Market Price and may
reflect a timing discrepancy, a pricing difference,
or a combination of the two.
A
timing discrepancy may result from silver price movements
after the London morning fixing used to calculate NAV.
While the iShares are open for trading on the AMEX,
silver also trades in London on the afternoon spot market,
in New York on the COMEX futures exchange, and in various
electronic exchanges. A change in the price of silver
traded in these markets may affect the trading price
of the iShares. This would result in a Premium/Discount
to NAV representing a timing discrepancy.
By
contrast, a pricing difference may result from a change
in the price of silver traded in London during the afternoon
session, or on a futures exchange, that is not reflected,
or only partially so, in the price of the iShares. A
pricing difference represents an arbitrage opportunity
for Authorized Participants who will sell the overpriced
item (iShares or silver), use the proceeds to buy the
underpriced item, and pocket the difference as profit.
iShares traders will sometimes anticipate arbitrage
chasing by the Authorized Participants, reducing the
profit opportunity and making action by the Authorized
Participants unnecessary.
It
may not be possible to determine the precise composition
of timing differences and pricing discrepancies in the
Premium/Discount and consequently it should neither
be relied upon as an indicator of the iShares' effectiveness
in tracking the price of silver from day to day nor
of an imminent change in the silver held by the iShares
Silver Trust resulting from Authorized Participants
taking advantage of arbitrage opportunities. The average
or mean of Premium/Discount to NAV over time, however,
may be a good indicator of price-tracking effectiveness
or imminent change in silver holdings.
**********************
Of
course, in my own work I try to use "the average
or mean of Premium/Discount to NAV over time" as
an indicator of balance between ETF share supply and
demand and the resulting overflow effect on the
physical silver market as metal is delivered to, or
withdrawn from, the iShares silver Trust. I also use
a proprietary intraday tracking mechanism that allows
investors to determine at a glance if SLV (or GLD) is
trading at a discount or premium to NAV. I plan to discuss
both these methods in the subscription service that
will be launched this century or next.
Slogging
on to take a peek at the other silver ETFs, we
find that the Swiss ZKB is still busy adding silver
and has now exceeded 22 million ounces while the London
version (PHAG) seems to be struggling to overcome the
decidedly unrounded 11 million ounce threshold.
Who knows, maybe somebody is 'naked' short selling PHAG
as well as SLV?
In
total, the confirmed stockpiles of silver now amount
to over 410 million ounces, which is about what the
best analysis said 3 years ago was out there to be had
in aggregate. The fact that such a quantity of silver
could be assembled at prices almost exclusively south
of $20 can mean only one of two things: (1) the alleged
effort to suppress silver prices has been a tremendous
success to date, but will fail any day now, OR (2) there
is some multiple of this 410 million ounces still hiding
out there, to be accumulated at some higher silver price.
The choice between these two possibilities has some
subjective elements that only time can resolve, and
I'm willing to be patient seeing that both scenarios
favor higher silver prices. Hey, I'd love to be wrong
that #2 is right if it means $100 silver!
In
closing, I will just briefly discuss the very disappointing
July silver deliveries at COMEX, which are running about
4 million ounces behind the pace of last year. There
wasn't that much excitement in the silver market in July
2007, and certainly there was little talk of possible
shortages. Some analysts attribute this year's lower
rate of silver deliveries to a concerted attempt by
the exchange to discourage speculators from taking delivery,
but even if that were true, it would not explain why
commercial users faced with shortages in London are
not drawing down the COMEX facilities. In the next
few days, we should know how much warehouse silver is
actually being withdrawn by commercial users. If it
is not a substantial amount, we can put another nail
(for now) in the silver shortage coffin. If and
when a true shortage does arrive, I have no doubt it
will be discernable in the COMEX figures (not to mention
the basis).
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