Shining Silver ETFs to follow Gold in 2009

January 23, 2009

Commodity Online
A report from India's National Commodity and Derivatives Exchange (NCDEX) says though Silver is currently plagued with the problem of supply surplus and falling prices, Silver ETFs will do well in 2009.

"Silver as we have been saying all along rallies well and outshines Gold during bullish phases but hits worse when the bears rule, losing all that it gained and much more. But Silver ETFs will shine in 2009," said NCDEX economist Manasee S. Gokhale.

In December too, Silver loyally followed Gold and began treading higher rising about 35 percent from its low times in October and gaining as much as 15 percent in December alone. Even in early January, Silver climbed higher to reach $11.71/oz, but when its time to fall, Silver will lead the way.

That would indeed be an apt term for this metal that has to balance the fine line between being an industrial metal and an investment metal. During the severe fall in precious metals in March last year which later rallied in July, Silver lost about 60 percent while Gold’s correction was at its maximum 34 percent.

"This could only mean that Silver was largely being treated as an industrial metal. But with the overwhelming response in the ETF’s and the turn around in the net fund long position, the attraction that Silver draws as an investment metal cannot be denied," the report said.

The rise in silver prices has corresponded to investment interest in the newly established silver exchange traded fund (ETF). The ETF was established in April 2006 and was modeled after the gold ETF that was started in 2003. Exports of silver rose dramatically in 2006 owing to movement of physical silver to the ETF inventory agency in London, United Kingdom. ETF inventories at the end of 2006 totaled 3,330 tons of silver and by the end of October 2007 had risen to 4,200 tons.

This week, silver spot prices attempted a downward test of the $10.30s. Metal holdings for Barclay’s iShares Silver Trust, the American silver ETF, reported adding a net 79.79 tonnes to show a new record 7,143.27 tonnes of silver metal held for its investors by custodians in London.

Silver is currently plagued with the problem of supply surplus and falling prices. Even if there are cutbacks in base metal mining, which will reduce the size of the surplus the total supply is going to have to be absorbed by investors if prices remain cheerful. Status of the ETF’s show that investors’ interest in Silver is still large.

And with the current economic condition, the constant crumbling of the financial markets and the heavy rescue packages that government’s are churning, it is highly unlikely that investors will think of riskier alternatives for sometime now.

Over the last 100 years the price of silver and the gold/silver price ratio has fluctuated greatly due to competing industrial and store of value demands. In 1980 the silver price rose to an all-time high of US$49.45 per troy ounce. By December 2001 the price had fallen to US$4.15 per ounce, and then it began to rise from 2006 to go above US$15.21 per ounce.

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