Silver ETF & Bolivia Confiscation

Silver Stock Report

by Jason Hommel, May 2, 2006

Silver ETF

As of the close of business on Friday 4-28-06, the Barclays iShares Silver Trust ETF (Trading symbol: SLV) had nearly 21 million ounces of silver, up from 1.5 million ounces of silver when it started trading Friday morning.   The Silver ETF (SLV) continues to be priced slightly higher than silver bullion spot prices; at present the ETF is at about $14.27/oz., (minus half of 1% annual fees and other expenses), while silver is at $14.18/oz.  This spread, driven by market created demand for the ETF, creates the arbitrage incentive for the Silver ETF market makers to buy physical silver, in lots of about 500,000 oz. for 50,000 ETF shares, for the trust.  Twenty million ounces is a shocking increase in the amount of silver purchased in a single day, and at this rate, the Trust could obtain about 100 million ounces of silver by Friday this week, and by next week, we might see a default on delivery of silver via NYMEX futures contracts!  Silver moved up over $1/oz. on Friday, up again about $.50/oz. on Monday and up another $.20/oz. Tuesday.

iShares Silver Trust

Frequently Asked Questions about the Silver ETF

I do not personally recommend that small, individual investors buy the Silver ETF.  I personally believe it is safer to own your own physical silver bullion, which you should own in case of brokerage house default, or if the markets simply stop trading for a year due to war or market meltdown.  I believe the ETF is primarily for large institutional investors, who simply cannot personally move very large quantities of silver bullion that they would like to buy for investment purposes.   If the price of silver stabilizes in about a month (or if market defaults on futures contracts do not take place), the Silver ETF may also be useful for large trading accounts such as IRA accounts, where it may be useful to trade into silver, instead of cash, to hold while deciding what other silver stocks to buy.

See my Brief Guide to Buying Silver:
What kind of silver, and where to get it.

Bolivia Confiscation

In an ominous move for silver investors who own mining companies with properties in Bolivia, Bolivia nationalized (confiscated) their gas industry, on May 1st.  If Bolivia does not care about property rights of natural resource investors, then silver properties are also at risk of nationalization, confiscation, or a “special tax”, or some combination.

Apex, Coeur d’Alene stocks drop on Bolivia worries

 NEW YORK, May 2 (Reuters) – Stock in two silver mining companies plummeted on Tuesday amid concern that mineral-rich Bolivia would extend its nationalization from oil and gas to other natural resources.

The fears were eased somewhat when Bolivian Vice President Alvaro Garcia later ruled out mine seizures, but he said big foreign mining companies must still pay higher taxes.

“There are not going to be company expropriations, of course, but we’re going to assume a greater level of state control,” Garcia said on La Paz radio, one day after President Evo Morales announced nationalization of the energy sector.

Companies at risk (in my opinion, from most to least) include:

1.  Apex Silver –whose flagship property is San Cristobol in Bolivia.  Apex Silver’s stock plunged on the news, from $21.20/share to $13.50/share, and bounced back to $18/share after a statement by the company that no mining confiscation is anticipated.  Nevertheless, why trust a known thief?  Not only is Bolivia suspect, but so is Apex Silver in my opinion, which recently hedged part of its production to secure a bank loan of over $100 million.  Losses on the hedges of unproduced minerals may already exceed the value of the bank loan!  

2.  Apogee Minerals –has a primariy portfolio of exploration properties in Bolivia.

3.  Coeur d’Alene Mines –has one of it’s most advanced development projects, San Bartolome, in Bolivia.  “Leading Coeur’s new growth in silver is San Bartolome, the largest new primary silver mine to be built in the Americas in decades. With construction underway, this major Bolivian silver mine is scheduled for annualized production of more than 8 million ounces of silver.”  Coeur has insurance against 85% of a loss through political expropriation.

4.  Pan American Silver –one of three key development projects, the San Vicente Mine, is in Bolivia.

Potential beneficiaries of a potential Bolivian confiscation or nationalization of silver mines would likely be silver itself.  After nationalization, foreign investment typically halts; which tends to prevent development of mines that may cost hundreds of millions of dollars to bring to production.  With lower production of silver, or even the expectation of less silver production, higher silver prices would likely result.

Other potential beneficiaries are companies exploring in North America.

Robert Kiyosaki, author of “Rich Dad, Poor Dad” investment series, continues to write positive things about silver.

Five Factors for Favoring Silver
by Robert Kiyosaki
Tuesday, May 2, 2006

He even mentions the Silver ETF as a positive development for higher silver prices.  

He does not mention the short position at NYMEX, which recently had an open interest of 200,000 contracts, representing 1 billion ounces of silver promised to be delivered, which is nearly 1.5 years worth of annual mine production, which is a larger position than in any other commodity, while the exchange has less than 100 million ounces registered for delivery.  

The Silver ETF, which is acquiring allocated physical silver, may soon bring the paper silver trading games to an abrupt end.  

I do not own any of the silver stocks mentioned in this report, nor do I own the Silver ETF (SLV); but I do own physical silver bullion and I own stocks in about 18 silver exploration companies.

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Jason Hommel