Silver Prices Must Rise: Silver ETF partially approved

Silver Stock Report

by Jason Hommel, March 21, 2006

Silver Prices must rise because of the silver shortage!

(This is my first email since March 2).  
The last Silver Stock Report covering over 80 silver companies was produced in July, 2005, and can be found here:

The Silver ETF is partially Approved!

NY silver sprints to 22-year high on ETF ruling
Tue Mar 21, 2006 12:21 PM ET

NEW YORK, March 21 (Reuters) – U.S. benchmark silver futures shot to a 22-year high on speculative buying on Tuesday after the U.S. Securities and Exchange Commission approved rule changes for a silver exchange-traded fund.

Silver for May delivery <SIK6> at the COMEX division of the New York Mercantile Exchange had surged [to] $10.55 an ounce, up 16.8 cents — the priciest for futures since late 1983 — by 12:13 p.m. EST.

The SEC said it has approved rule changes that will allow the American Stock Exchange to list shares in Barclays Plc’s <BARC.L> iShares Silver Trust, which is designed to track the price of the metal. [ID:nWBT005013]——————
My comments:  CORRECTION: The SEC has approved the rule changes, and the AMEX listing, not the Silver ETF itself.

The Silver ETF itself, has not yet been approved, and is not yet trading.

The iShares are [to be] listed and trade on the American Stock Exchange (the “AMEX”) under the symbol “SLV”.

It was feared by the Silver User’s Association, that this Silver ETF would create a silver shortage, since up to 130 million ounces of silver were supposed to be purchased to back the Silver fund, and, in theory, that could create a silver shortage, since the NYMEX commodity exchange has barely over 100 million ounces of silver.  

Silver Users Fear Silver Shortage
Nymex Silver Warehouse Stocks

But there is another source for silver.

It is possible that Warren Buffett’s Birkshire Hathaway’s 129.7 million ounces of silver have been used to back the fund.  And thus, no immediate silver shortage may result.  Nevertheless, silver prices did rise to a new high today of $10.55/oz. briefly on the news of the approval of the Silver ETF.

Regarding Warren Buffett’s silver, I can only speculate.  But as a silver writer, I hear things, and can speculate, and so I will.

I have heard from several reliable sources over the years that Warren Buffett was prevented from buying any more than the 129.7 million ounces of silver he acquired for his fund.  I heard that the U.S. government basically told him, “You can’t buy any more silver.  We won’t let you.  You may win the battle on silver, but your other insurance businesses that require licenses, will be revoked, and you will lose the war if you go to war with us on this.”  One source was a merchant banker who contacted Warren Buffet’s people for the purpose of trying to convince Warrent to buy gold stocks, back in about 2000.  Another source is a prominent newsletter writer that I follow.  And I’ve heard the same thing from other sources, too.

Other particulars about Warren’s silver are that it is stored in London, and that he was not able to receive full delivery of all of his physical ounces of silver.   He didn’t exactly lease out the silver that he never received, but he did allow those who had shorted him the silver, more time to deliver, which is something similar.  

I do not think that Warren sold his silver, since he said, at the time, “equilibrium between supply and demand was only likely to be established by a somewhat higher price”

Supply and demand in the silver market have not yet reached an equilibrium, especially not now that investors are just beginning to become aware of the silver shortage, so there is no reason to suspect that some of Warren’s silver has been sold nor any reason to think it may be sold any time soon, even if it is used to back the Silver ETF (and both items are pure speculation).

But there is a good reason why Warren Buffett may have lent some of his silver to help establish the Silver ETF–for reasons other than selling it (which does not make sense to me).  First, the Gold ETF’s were put into place by the former head of Calpers, which is the California Public Employee’s Retirement System. This is important to note, because many funds like Calpers, which has about $200 billion to manage, need something like a Gold ETF in order to buy gold. Further, Warren Buffett is also friends, and economic advisor, to the Governor of California, Arnold Schwarzenegger, so it could be that Warren Buffett himself is a guiding force behind the establishment of the Gold and Silver ETF’s, if only in an advisory sense.  Even Warren’s public statements, condemning derivatives, are a type of support for the gold and silver ETF’s.

My point is that if Warren used some of his silver to back the Silver ETF, he may have done this for a good reason: to help other large funds, like Calpers, buy silver!  The point is that a Silver ETF has a legitimate reason to go into the market to acquire more silver for the fund, whereas Warren Buffett (and Birkshire Hathaway) may be blocked from buying any more silver.

So, my conclusion is that the approval of the Silver ETF may not cause an immediate shortage in the silver market by the time it starts trading on the AMEX, under the symbol, “SLV”.  But longer term, say, in the next year or so, we should expect silver prices to rise significantly, as $200 billion dollar funds like Calpers (and thousands of other such funds), finally have a way to buy silver.

Silver should rise significantly, because if there is only about 100 million ounces, then, at $10.50/oz., that’s only about $1.05 billion dollars!  By the time $2 billion dollars of investment demand tries to buy silver, you probably won’t be able to imagine how high silver prices will be.

Next item:
Spitzer threatens “vast” fines for H&R Block

The issue is that H&R Block set up IRA accounts for up to a half a million customers–beginning investors, and put the money into bonds, as a standard investment.   These accounts had account fees which were greater than the interest earned from the bonds.  So, most investors, over 80%, lost money.  

I don’t know what the amounts involved are, but you can open an IRA account for about $1000, and 1% interest is $10, and most reasonable account fees, such as $30/year to compensate H&R Block for the paperwork, is naturally be more than that.

If interest rates are set low, by the U.S. government, which they are, I think you can hardly blame H&R Block for deceiving customers, by helping them get started saving money in tax deferred IRA accounts, which also reduce income taxes.  For example, if you earned $50,000/year, and if your income taxes were 40%, then if you put $1000 into an IRA account (that loses money) you can still come out ahead on taxes, since your income, for tax purposes is reduced to $49,000, and thus, you save 40% in taxes on the $1000 you managed to put into an IRA, which is $400 savings (even if it does lose $20 in fees.)

But Spitzer wants to fine H&R Block up to $250 million!  Wow!  

My advice to H&R Block is quite simple.  Simply threaten to change the “standard investment recommendation” for all people who set up new IRA accounts.  If H&R Block is at fault due to the low interest rates set by the government, then H&R Block should put all new IRA account money into the new Silver ETF.  After all, Silver prices have risen by over 50% per year for the last two years, and H&R Block could hardly be sued by the government by helping people to make money.

My guess is that if H&R Block threatened to buy silver instead of bonds for new IRA account holders, that the lawsuit by Spitzer would simply “go away”.

Next item:

Robert Kiyosaki of the book series, “Rich Dad, Poor Dad” thinks gold and silver will go up in value, and that the dollar will go down.

Next item:
Not only did Silver hit a new high today, so did copper and zinc, too, exceeding the news highs hit by all three metals on Friday.  

Zinc hit $1.14/lb., and copper hit $1.38/lb.

All three metals are suffering from a shortage. 

In silver, it was feared that a shortage will be created if the new Silver ETF buys 130 million ounces of silver. 

World copper inventories are down to less than 3 days. 

World zinc inventories are down to 13 days, and rapidly shrinking. 

Silver and copper are often mined together, just as silver and zinc are also often found in the same mines.  If silver prices are higher, the world can produce more copper and zinc, as byproducts.  And if copper and zinc prices are higher, the world can produce more silver, as byproducts.  But with all three metals facing a shortage, it looks like the rise in prices for all three metals may continue for some time. 

All three metals also suffer from excessive futures trading.  People will sell promises to deliver the metal in the future, hoping to make profits if the prices fall.  When too many people sell these kinds of promises, it appears to the markets as if there is abundant supply, when there really isn’t. 

The open interest in silver is currently about 167,000 contracts for 5000 ounces each.  That’s a total of 835 million ounces of silver.  And yet, at NYMEX, there are just under 53 million ounces eligible for delivery against a futures contract. 

If a silver shortage is feared by the Silver ETF possibly buying 130 million ounces of silver, then the sellers of these paper promises to deliver silver in the future are going to be in a world of pain as silver prices continue to rise. 

Since all of the paper contracts were entered into at substantially lower prices, it looks likely that we will see a short squeeze in the silver market.  When this happens, those who sold silver that they didn’t have will panic to buy this silver at ever higher prices in order to cover their contracts.  Fearing ever higher prices, those who sold silver, must buy silver to exit their contracts and close out their positions.  That buying will will cause higher prices, which can result in a very rapid upward spiral of higher prices.