Why the silver ETF will send prices soaring

published 7 November 2007

Silver is in a secular bull market, says David Fuller on Fullermoney last week, the metal closed at more than $10 per ounce for the first time since 1983.

The 22-year high was caused by speculation that the Securities & Exchange Commission (SEC) would finally give the go-ahead to a silver exchange traded fund (ETF).

An ETF is a basket' of a commodity against which shares are issued and then traded on the stockmarket. In this case, each basket would be made up of 500,000 ounces of silver, represented by 500,000 shares. Gold ETFs have become so popular that last year ETF investors held more than 14 million ounces of gold "equivalent to about a quarter of last year's global supplies", says Kevin Morrison in the FT.

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But can the silver market possibly cope with so much new demand? No, says the Silver Users Association, a US industry group. "The ETF will cause a shortage of silver", which will have a negative impact on the industry. In other words, if the ETF increases demand then the price will go up.

That's bad news for silversmiths, but good news for investors. The silver price is already 60% above where it was at the start of 2005 and "if there was a favourable ruling on the silver ETF, we could see $12 on silver", John Reade, precious metals strategist at UBS, told the FT.

Until the ETF is finally launched, we can settle for Central Fund of Canada (AMEX:CEF), Silver Wheaton (AMEX:SLW; TSX:SLW), or Standard Silver Resources (Nasdaq:SSRI; TSX:SSO) "as the closest thing to directly owning silver in our stock accounts", says Tom Szabo on Resource Investor.

Annunziata was a deputy editor at MoneyWeek, covering financial markets, politics, economics and comment pieces. She then went on to the Daily Telegraph as a lead writer where she wrote a column on young women’s financial issues. She was briefly a member of the European Parliament for the East Midlands region in the UK as part of the Conservative Party. Annunziata continues to write as a freelance journalist.