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« Gold Prices Awaiting Technical Signal | Main | There’s Always a Silver Lining »
Friday
Mar132009

ETFs SLV and GLD Another View Point!

iShares logo

SPDR Gold Shares



For those of you who are interested or indeed invested in either the iShares Silver Trust (ETF) or the SPDR Gold Trust (ETF) we have this article very kindly sent to us by David Morgan of silver-investor.com.

Entitled: Silver—Draw the Line, we have printed it in full as follows
:

Recently (3-07-09) I was interviewed on Financial Sense Online, and the discussion revolved around the Silver Exchange Traded Fund (ETF). Mr. Jim Puplava, who hosts the show, asked some piercing questions about the gold and silver ETFs.

Something Jim and I discussed was that Barclays changed the words in the original prospectus from “Silver Bullion” to just “Silver,” which reading as a lawyer would, begs the question Why? To me it implies there might be other silver investments that count but are not necessarily bullion.

One benefit I stated early on is that the silver ETF eliminates two major problems of purchasing large quantities of silver.


Where do I store it once I have bought it?
How can I buy a large quantity at once in the “physical” market?

But I never will consider it to be a primary silver investment. Knowing that the SLV is ALWAYS cash settled should raise an eyebrow or two. Certainly the SLV was set up primarily for larger institutional types to participate in the silver market. The tax consequences are also something any investor would be smart to determine before making an investment.

On balance it does bring attention to the silver market, has provided much more participation into the metals market, and has a fairly low risk if all you want to achieve is a paper gain. But under no circumstances do I consider it to be a silver investment. It, as with a mining stock, futures or options contract, or anything else that you do not hold in your own hand, is a derivative!

Also, as has been pointed out on the Internet before, SLV added 20M oz of silver to their “inventory” on December 31, 2007, only to remove it on January 1, 2008. Either they hired an entire fleet of armored cars for two days or that silver was a paper scheme all along.

I wish to digress here a bit to say that the Central Fund of Canada does have the real silver and gold they report, but the process of moving a new silver purchase takes time—lots and lots of time. As pointed out, it is impossible to move 20M oz of real silver that quickly, not with all the checks and balances required—let alone the manpower and small work space.

James Turk and others have also addressed the unanswered questions about these ETFs in earlier interviews. In fact, when it finally was introduced into the investment arena a few years ago, I asked James to help me with some of the finer points on the SLV.

As many others and I have pointed out numerous times, there are bar lists and the bars are likely real and do exist. During the interview with Jim Puplava, I gave one of numerous possibilities that could put bars into “inventory” and yet still have several claims against them. Again, the issue with them is whether the ETF really owns them free and clear or they are encumbered or otherwise compromised.

Another point is, the SLV can be “shorted” and this silver does not have to exist in inventory.

I have a fantasy about the paper precious metals markets; in my case obviously it would be focused on silver. I imagine myself standing in a large football stadium—something like the Rose Bowl would do nicely—and all participants with silver holdings (metal or paper) of one thousand ounces or greater fill the stadium. I draw a line at the fifty-yard line. I take all the silver on paper and place it on the east side of the fifty-yard line; all the physical silver I place to the west of the fifty-yard line. Then I calculate the value of each side.

Guess what! The dollar amounts of the two sides will not match—not even close—I guarantee it! There is far more paper silver than physical silver. This can easily be proven and has, by some of my earlier articles and by numerous other writers in this space.

The controversy surrounding the gold and silver ETFs continues and there are proponents both for and against the GLD and SLV. In an effort to remain consistent personally, my original “take” on the silver ETF remains, which is to state that any “investment” involving silver would have an overall positive effect because it would draw more and more attention to both professional and private investors that indeed silver is not only a worthwhile investment but also has all the monetary qualities of gold and has an industrial component that will remain, under any economic conditions.

For a good presentation of differing viewpoints, I suggest reading A Problem with GLD and SLV ETFs, by Trace Mayer, whose interview I conducted in Phoenix at the Silver Summit and will post at a later date. If you are interested, go to Runtogold, Trace also prepared an article titled, “Oil Majors Should Just Buy Real Gold,” .

It is an honor to be.

Sincerely,

David Morgan

Mr. Morgan has followed the silver market daily for more than thirty years. Much of his Web site, www.silver-investor.com, is devoted to education about the precious metals. To receive full access to The Morgan Report click the hyperlink.

Having read the above we remain uncomfortable with this type of fund as an investment vehicle for those investors wanting exposure to silver and gold and will not be allocating any of our cash to either of these funds. The decision of where to invest is and always will be yours and yours alone, so don't be put off by us we are just trying to explain why it doesn't fit with our investment strategy.

Got a comment – then let us have it!

If you are new to investment in the precious metals sector then you may wish to subscribe of our FREE newsletters regarding gold stocks, silver stocks and uranium stocks, please click on the links.


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Reader Comments (6)

Thank you for keeping us up to speed. Keep that info coming, I know that I need it.

John

March 16, 2009 | Unregistered CommenterJohn Ell

An excerpt from The Gold Report Interviews Roger Wiegand on Kitco:

TGR: Have you seen the premiums come down at all in the coins?

RW: Yes, but it’s so scattered I can’t give you quotes. Some are more available than others. Bars are easier to buy, because for the most part, folks would rather have coins than bars. There are more problems in buying and selling bars—assay, insurance, delivery, storage. It’s simply easier to trade coins. Personally, I have silver coins; but in the next rally go-round, in the next year or so, I would like to buy gold coins. Then, of course, you can use Kitco, Goldmoney.com, the Central Banks and CEF in Canada. The Perth Mint has availability. You can trade GLD and SLV, but I would not be a long-term ETF holder. Trade them, but be very wary.

TGR: Why is that?

RW: I think if we get into a nasty situation regarding delivery and some other problems, you could be out in the wind on ETF delivery. You are holding paper with a claim. I wouldn’t do it.

To read it all click this link:
http://www.kitco.com/ind/GoldReport/mar162009.html

March 16, 2009 | Unregistered CommenterGold Prices

ETFs are a huge part of the reason PM stocks have declined so much and remain so anemic. ETFs have taken away much of the money that used to be invested in PM companies. And for what? Paper promises. Meanwhile, the PM juniors cannot advance their projects; some may be forced out of business due to the re-direction of capital to the ETFs. Same situation actually with uranium. I suppose it's a bit late to make ETFs illegal??? They may have rendered newsletters such as this one defiitively null and void, "caduques". Neil

March 16, 2009 | Unregistered CommenterNeil Bishop

Neil, Well put as usual, but if ever the ETF storage is found to be not as full as it should be, then what price then for the PM stocks?

March 17, 2009 | Unregistered CommenterGold Prices

Thinking of precious metal ETF's? Then you better think again...
Can't you see the yellow caution light that is flashing...

I would like to explain the difference between investing in the actual metal versus precious metal ETFs. One should completely realize when buying a precious metal ETF, it is simply a representation of the price in gold or silver. Investing in precious metals entails buying the real metal directly or through a program that offers the right to receive physical metal in deliverable form upon liquidation with no conditions. What is overlooked by most professionals?

One of the items that I read in the prospectus of the gold and silver ETFs that concerns me relates to the reported expenses of the fund. I am a professional expert in the storage and security of gold and silver. I run a fully segregated and insured storage program that is independent of the financial system. I also run a very unique physical gold and silver bullion fund that takes delivery of all physical metal, as well as, stores and insures the metal outside the financial system in fully segregated and armored vaults. I am very knowledgeable with the cost of insuring and securing physical metal.

The expense ratios for many of the ETFs and other funds are very telling. Many products want to have the lowest fee to attract today's cost conscious investor. However, there is an old saying, "You get what you pay for". I
will take the SPDR Gold Shares "GLD" for example. They claim the custodian charges .10 % or 10 basis point to properly safeguard the gold. A qualified custodian must properly store the physical metal through the use of very
specific security controls such as cameras, sensors, armed guards, etc. However just as important is the insurance which would protect the facility and owner of the metal in the event of a breakdown in the security controls
of the vault.

What is fascinating is the unbelievably low cost the SPDR Gold Shares pays for this security and insurance. Lets forget about the cost of simply providing a secure facility to store the gold.

At these level of assets, there is only one company in the world that insures physical precious metals in armored vaults. I have been told there is no way this insurance company would charge a meager 10 basis points annually for an "all risk" policy. That is equivalent to insuring a car worth $10,000 and its driver for ten dollars a year. No insurance company could ever make enough money to cover the risk of loss on that policy exceptmaybe AIG.

Even some of the largest custodians for valuable assets pay a minimum of 15 to 25 basis points just for an "all risk" insurance policy. Personally, I question any program that stores their metal at a financial institution. In many cases, the financial institution is internally insuring
much of the gold it stores. The problem with that is, if the institution runs into financial trouble the owner of the metal has no protection against the loss or damage to the items being stored. And isn't the idea of owning gold and silver a hedge against a failure in the financial system?

That is why our programs store everything outside the financial system in independently insured vaults.

Bob Coleman
www.goldsilvervault.com

June 1, 2009 | Unregistered CommenterGold Prices

The spot price of silver has been climbing for months over inflationary concerns, so don’t wait until the price of silver becomes out of reach. In comparison to gold, silver bullion offers considerably more upward potential, and is far more affordable for the average investor. If you’re seeking a sound investment for the future, you should think seriously about buying silver.

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