ETF, Silver… Impossible Combination?


One of the most common investment vehicles for mainstream investors today is the ETF (Exchange Traded Fund).  ETFs are a very easy way for folks to play different investment classes in a familiar form that mimics a mutual fund in some ways.  At the same time, the ETF actually trades much like a stock, while eliminating some of the dislikes people have with mutual funds.

As far as precious metals are concerned, there are a variety of ETFs to choose from.  You can find some that follow various companies, like producing miners for instance, while others may follow specific commodities like uranium, natural gas, or bullion.  Among the most popular are the gold ETF GLD and silver ETF SLV.  As for the silver ETF, silver enthusiasts can easily participate in the silver price appreciation.  By purchasing one ETF, silver is instantly and easily part of your investment buffet without ever dealing with the limitations of mutual funds.

On top of this, there are additional benefits.  Using a vehicle like the SLV ETF, silver can dump profits into your account and you may not even be able to identify any mining company by name!  Moreover, you might not be able to guess within $20 the price of silver.  Moreover, you may have never even seen silver apart from the pendant you got for Easter last year.

ETF Silver Investing – What Do You Really Own?

So far, so good.  Yet, as you may imagine, there’s a flip side to every coin.  As best as I can tell, when you use the SLV ETF, silver may not really be part of your portfolio after all.  On the one hand, you obviously don’t own silver physically in hand; you just have another listing in your open positions display when you log on to your account.  Now, admittedly, you can argue this is true of all of your investments.  And, that’s true.  But, here’s my point.  If you snatch up a position in this investment vehicle, what exactly do you own?

ETF Silver Investing – Market Size Matters

This is the best of my analysis on the matter.  Let’s start by understanding that the silver market is very, very, small.  Best guesses assume there are just 600 million ounces of silver produced each year.  Six hundred million of anything can sound like a lot, but you need to keep 2 points in mind.

First, nearly all of this gets gobbled up by manufacturers, since silver has widespread industrial applications.  Once this happens, there may only be 100,000,000 ounces left for me and you as investors.  If everybody in America wanted just one ounce of silver this year, we’d be out of luck and silver would have to be rationed to the tune of more like just 1 ounce per household!  I trust you can see how skinny the market really is now!

Second, let’s consider raw numbers.  Let’s just use a $20 an ounce for math purposes and you’ll see that the silver investment market is only 2billion dollars strong.  Thirty dollars per ounce gives us just a $3,000,000,000 market.  $50 silver takes us to just 5 billion dollars.  This is a very tiny market.

Hopefully you can see how small, relatively speaking, the silver market is for investors wanting to not only store value but also enjoy the appreciation that occurs.  With that as a backdrop, consider the following.  In the SLV ETF, silver is the big holding when it comes to assets, right?  From a different vantage point, note that SLV purposes to track physical silver bullion prices.  So, the tangible assets should be silver.  Yet, let’s get real and face the facts that SLV is not grabbing all available 100 million investment ounces each year.  I say this with confidence because I have some of it!

ETF Silver Investing  - A Sound Silver Investment?

This leaves us to note that SLV is adding something less than 100 million ounces each year.  How does the amount added correspond to the market cap of SLV?  Get my point?  For the ETF to move, there should be silver pushing it higher.  But how could SLV really, truly rise in price in accordance with silver bullion if there is not enough there to support the price?  I cannot help but wonder how SLV is any different than the Federal Reserve’s fractional reserve system that has not led to stronger dollars, but rather diluted ones.  Suppose that everyone who owns SLV all the sudden wanted to take delivery of their supposed corresponding investment in physical silver.  Wouldn’t they come up short in the same way that the Fed can no longer honor silver certificates and hence suspended making them?

To me, ETF silver investing is much like a popular childhood game where somebody always ended up holding the bag.  Remember the name?  It’s musical chairs.

If interested, I’ve written a companion article on ETF Gold investing you might like to read.