The Introduction of a silver ETF could send shockwaves through financial markets

Silver futures started its upward journey on last Wednesday on market speculation that Barclays Global Investors may eventually win approval from the Securities and Exchange Commission to launch a silver exchange-traded fund. Chinese gold prices finished lower ahead of a holiday next week, while European gold was trading marginally lower.

However, with the outlook for the US economy mostly improving this week, prior to the President's State of the Union speech on Tuesday along with the new Federal Reserve chiefs statements, and the overbought levels of precious metal stocks, indicate a correction is in the very near future.

The relentless sharp rise in price of commodities especially oil and metals, sends a strong signal for a strong market correction. I am expecting to see Crude Oil to remain in the spotlight this week.

US crude oil futures ended higher for the second straight day on Friday as supply worries over Iran and Nigeria overshadowed hefty increases in US petroleum inventories reported at midweek. Crude for March delivery settled $1.50 higher, or 2.3 per cent, $67.76 a barrel, after hitting a session high of $67.95.

Benjamin Train
January 30, 2006
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Funds lift silver to new peak, platinum sets record
By Atul Prakash

LONDON (Reuters) - Silver set a 19-year high on Friday, before faltering in New York on profit taking, as funds poured money into the metal on speculation that a silver-backed exchange-traded fund (ETF) might spur demand.

Silver led New York precious metals higher this week after taking the baton from gold which hit 26-year highs a week ago.

But by Friday the complex looked tired, except for platinum, which continued to another record.
At the COMEX division of the New York Mercantile Exchange March silver closed unchanged at $9.605 an ounce, snapping a four-day winning streak. It peaked in early trade at $9.80 the loftiest benchmark price since April 1987.

"We are seeing a short term impetus to the market on the back of the ETF story," said Jeremy East, global head of precious metals at Commerzbank.

"Looking at it now, we could easily see silver up at $10."

Silver, used in jewellery, photography and electronics, has jumped more than 11 percent this week on reports that Barclays Global Investors' iShares Silver Trust might be approved in the United States.

Each share would be worth 10 ounces of silver. The security would require the purchase of silver bullion to guarantee it.

"Buying interest is fuelled by the apparently almost certain prospect of a silver ETF," RBC Capital Markets said in a report.

"The Silver Users' Association fears that an ETF will remove enough stocks to drive the market into a serious deficit," the report said, adding silver inventories had fallen to less than 600 million ounces from 1.4 billion in 1991. Spot platinum rose to its highest ever level of $1,065/1,070 an ounce, and closed at $1,064/1,068 in New York.

NYMEX April platinum futures rose $7.60 to $1,072.70 an ounce.

Analysts said current high prices were not sustainable, but the near-term momentum was positive.
"We continue to warn that all the precious metals are vulnerable to a sharp correction although we suspect that fundamental demand for gold and platinum will support these metals more than silver and palladium in the event of a correction," John Reade, analyst at UBS Investment Bank.

ETFs DRIVE DEMAND

Exchange traded funds, aimed at drawing investment capital, are designed to reflect the price of specific goods and trade like listed stocks on any exchange.

Gold ETFs are traded on some of the world's major stock exchanges and have accumulated 425 tonnes, valued at about $7.6 billion. An amount equal to 20 percent of investment in gold ETFs might generate 4,500 tonnes of silver demand, analysts say.

Alan Williamson, analyst at HSBC Bank, said in a note if the funds were a central bank, they would now collectively rank as the world's twelfth largest gold holder. Gold holdings by central banks and the IMF is estimated at around 31,000 tonnes.

COMEX February gold went down $1.10 to $558.80 an ounce. Spot gold rose as high as $563.90 an ounce before easing to $559.20/0.10 in New York, down from $559.70/560.60 on Thursday. Friday's afternoon London fix was at $561.75.

Gold reached a 25-year high last Friday at $567.60.

"Anti-inflationary and safe-haven hedging look set to provide good support in the coming sessions, particularly after the victory by Hamas in the Palestinian elections," said James Moore, analyst at TheBulliondesk.com.
Hamas swept to victory over the long-dominant Fatah party in the Palestinian polls, and Israel immediately ruled out talks with any government involving the Islamic militant group.

Gold has been firm because of worries about rising energy costs, dollar instability, fears of attacks on the U.S. mainland and tension in the Middle East including Iran's nuclear intentions.

NYMEX
March palladium eased 50 cents to $278.00 an ounce.
Spot palladium was last indicated unchanged at $272/276.


SILVER ETF PACKS PUNCH
Friday, January 27, 2006
Todd Stein & Steven McIntyre Texas Hedge Report
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In our articles titled "Silver ETF: Shock & Awe" and "Powerful Silver ETF", we highlighted how the introduction of a silver ETF would send shockwaves through the financial markets. We used the introduction of the U.S. gold ETFs (tickers: GLD & IAU) as a model of what would happen to physical silver demand once the silver ETF (proposed ticker: SLV) starts trading on the Amex. Now that a little more than one year has passed since the gold ETFs were introduced, let's take another look at just how much demand for silver could be impacted.

In their first twelve months of trading, GLD & IAU (the two gold ETFs) accumulated well over 7 million ounces of gold in their vaults. Then, in the following three months, an additional 3 million ounces have poured in. At $558/oz, this means that nearly $6 billion of new demand has been created by the two U.S. gold ETFs over their first fifteen months. Some shifting from physical bullion to the ETFs may have occurred, but near as we can tell, it has been negligible as most of the demand created by the ETFs is truly new.

If silver, through its ETF, can add over time in dollar demand what GLD & IAU did in just 15 months, we are talking about an additional 600+ million ounces being taken off the world market. With silver trading at around $9.60/oz, $6 billion in incremental investment demand would translate more precisely into about 625 million ounces of the grey metal. This would almost certainly wipe out the entire world's identifiable supply of above ground silver (about 550 million ounces according GFMS). Is it any wonder why the SUA (Silver User's Association) is trying to cry "uncle" to the SEC in the hopes of putting the kibosh on the silver ETF?

Now before you back up the truck and start hoarding silver bars, please realize that we do not expect 600+ million ounces to be sucked up anytime soon as a result of the silver ETF. Furthermore, we are skeptical that GFMS is able to pin down the above ground silver supply at 550 million ounces when there could theoretically be large unknown amounts of silver sitting in China and India and/or private hoards.

With all that said, we do think the 500-600 million ounces in relatively easily liquidated above ground ounces is a conservative place to start for liquid silver inventories. The real question then becomes how much silver is likely to be consumed over the next year or two by the impending silver ETF which, thanks to recent rumblings by Barclays and Amex, appears closer to getting approved by the SEC.

Read the entire article at: http://www.freemarketnews.com/