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Right now, there is a heck of a lot of talk about silver ETFs. Given the fact that the metals are moving up rapidly over the recent years, silver is up from about 5 bucks to about ten. Gold is up from about 300 to going on 600, and this is since 2002. So, in 4 years gold and silver have doubled. Now, there is talk about the fact that the gold price is managed (manipulated down) by central banks. Well, if you had a money machine that could print money on demand, like they do, maybe you would manipulate gold too if you could….. Of course that is not right though. Never mind. Now, there is far more gold in central banks than silver. The US has about 8000 tons of gold in reserve (public statistic) and it has sold its billions of ounces of silver over the last 50 years. Now we have None. The other central banks have similar positions, i.e. they have virtually no silver. But China is said to have a secret stockpile of silver. And I believe that. The proposed silver ETFs are going to create a situation where there is NO WIGGLE room for central banks. Now lots of people are naturally going to invest in silver ETFs, and frankly I think that is not a good idea. But, if you want paper profits and know how to exit right, then maybe this paper monstrosity is for you. But it is not for me, and I’ll get into that in a few paragraphs. In any case, the silver ETF may indeed be the thing that brings down the monetary house of cards. Reason? The central banks have virtually no silver to hold down the price. If the metal action VSVS currencies were to be directed into a hot silver ETF driven market, we could see a real hit to the paper currency market because gold would naturally rise in tandem to silver. It would drag central banks indirectly into defending their currencies via gold, because the silver ETF would perhaps skyrocket. Then gold naturally would rise in tandem with the silver shortage generated by a silver ETF. But, As I have, said I don’t like a metal ETF. What ETFs do An electronic trading fund takes in money and is said to buy the commodity and hold it in a vault. Your position in that fund is an electronic entry. As the prices rise and fall, theoretically the fund will buy and sell metal to keep the mixture correct. Also as redemptions and new money come in they buy and sell the actual commodity for the fund. That is the theory. Now, in my past articles about ETFs, I have stated that they are really speculation vehicles, and in fact the ‘gold/silver’ moniker is really more of a reason to speculate, and not the other way around, IMO. Here is an excerpt from my article ETFs are Not Real Assets: There are ETFs coming online for many things now. These funds are supposed to be market participants, but really, they are loaded with liabilities. I have written in the past about my belief that gold ETFs are not worth messing with. You buy a gold ETF to get out of paper dollars, but the gold ETF is paper too! Your account is an electronic book entry against the ETF and is only as good as the credibility of the ETFs principals and employees. Furthermore, the laws of the host nation have to be in favor of you, (ie you have to be allowed to have gold in the first place, or there cannot be a real currency crisis, in which case, if an ETF has several hundred tons of gold I guarantee you will never see that gold yourself, but you have merely paid to have it stored so that the government in crisis can buy it from the ETF at a fixed price THEY choose, not you. I am concerned about the problems associated with new paper investment vehicles that require more liquidity than the market is able to provide. I suppose that if an ETF is having trouble getting their hands on the physicals, (mere claims on some bullion in someone's vault like Brinks) that they will find analogous ways to get claims on more bullion, not necessarily by buying it but by creating new paper claims against some gold somewhere, if not in a Brinks vault, then some kind of claim on some gold by who knows what method. You see, the thing recedes. People want to buy gold through an ETF but really they are forgoing what the actual issue of gold is about and that is physical possession of bullion, and not paper claims! … Now let us return to an ETF. Given the fact that these are really paper promises from an ETF to you, the investor, you realize of course that you are depending totally on their integrity, solubility, and market liquidity, that the physical assets you think you are buying are actually there where you think it is. AND if you want to ever get it back, I predict the best way to redeem it will be again, in dollars, and not in that asset in kind. Like taking delivery on a COMEX contract. But you think that you are owning a real thing. An ETF is regulated by the laws of the land. Laws change. What you buy into today may be completely different from what you are owning tomorrow, basically depending on the financial stability of the Nation in question, and at the whim of the legislators or the President, who can change anything and have changed everything in times of great crisis. The problem is that, should there be a real financial crisis, all you would ever get out of an ETF would be more paper or electronic dollars! I have been writing about this issue in the PrudentSquirrel newsletter for a while. Several of my subscribers, upon reading this view I have on ETFs contacted their ETFs with some questions. First, one subscriber had money in a gold /silver ETF. Upon reading my contention that they will never see any actual metal, but only be redeemed in dollars, the subscriber called his ETF and asked if he wanted some metal, could he get that instead of the paper dollars. Answer? NO. Now, imagine that in a real USD crisis, the ETF ‘gold’ or silver you thought you had, is really an amount of US dollars, that are given back to you, but that currency is crashing. That means that all you would get out are US dollars, amidst a collapsing USD market. A lot of good such an ETF would do you. Of course if the USD does not totally collapse, your dollars redeemed should be much higher, but, the VALUE of those dollars is way less than the dollars you put into the ETF in the first place. So you think you make a hundreds of percent profit, but the dollar in this example is devaluing faster than that! Another subscriber called his ETF and asked if the actual gold holding grow, or how do they keep up the stock? Answer? Your dollar value goes up in the ETF but your actual gold percent drops accordingly! He said he didn’t want to buy gold to have it drop in gross amount! Yes, I think so too! See how complicated this gets when you don’t just buy the bullion yourself? Again, I maintain that people may make lots of paper profits or not in an ETF, but they are most likely never to see one ounce of metal at any point in the process, in or out. ETFs are speculation vehicles and are not real metal investments, they are trading mechanisms. They get to hold all the gold, you buy it for them, and all you get in or out is paper dollars. SO don’t confuse ETFs with actual bullion purchases because they are not the same at ALL. There is a very interesting Email that I received from another subscriber where he asked a major gold ETF about my assertions that ETFs are not very good vehicles for metal investing in regards to safety. The ETF replied at length to my 5 major points of concern. [More later.] © 2006
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