 Silver ETF Packs Punch
Todd Stein & Steven McIntyre
The Texas Hedge Report
January 28, 2006
Courtesy of www.texashedge.com
In our articles titled "Silver
ETF: Shock & Awe" and "Powerful
Silver ETF", we highlighted how the introduction of
a silver ETF would send shockwaves through the financial markets.
We used the introduction of the U.S. gold ETFs (tickers: GLD
& IAU) as a model of what would happen to physical silver
demand once the silver ETF (proposed ticker: SLV) starts trading
on the Amex. Now that a little more than one year has passed
since the gold ETFs were introduced, let's take another look
at just how much demand for silver could be impacted.
In their first twelve months
of trading, GLD & IAU (the two gold ETFs) accumulated well
over 7 million ounces of gold in their vaults. Then, in the
following three months, an additional 3 million ounces have poured
in. At $558/oz, this means that nearly $6 billion of new demand
has been created by the two U.S. gold ETFs over their first fifteen
months. Some shifting from physical bullion to the ETFs may
have occurred, but near as we can tell, it has been negligible
as most of the demand created by the ETFs is truly new.
If silver, through its ETF,
can add over time in dollar demand what GLD & IAU did in
just 15 months, we are talking about an additional 600+ million
ounces being taken off the world market. With silver trading
at around $9.60/oz, $6 billion in incremental investment demand
would translate more precisely into about 625 million ounces
of the grey metal. This would almost certainly wipe out the
entire world's identifiable supply of above ground silver (about
550 million ounces according GFMS). Is it any wonder why
the SUA (Silver User's Association) is trying to cry "uncle"
to the SEC in the hopes of putting the kibosh on the silver ETF?
Now before you back up the
truck and start hoarding silver bars, please realize that we
do not expect 600+ million ounces to be sucked up anytime soon
as a result of the silver ETF. Furthermore, we are skeptical
that GFMS is able to pin down the above ground silver supply
at 550 million ounces when there could theoretically be large
unknown amounts of silver sitting in China and India and/or private
hoards.
With all that said, we do think
the 500-600 million ounces in relatively easily liquidated above
ground ounces is a conservative place to start for liquid silver
inventories. The real question then becomes how much silver
is likely to be consumed over the next year or two by the impending
silver ETF which, thanks to recent rumblings by Barclays and
Amex, appears closer to getting approved by the SEC.
Below we have built a ballpark
estimate of what we think is possible in silver ETF demand over
its first 15 months:
Although this is mainly guesswork,
our conclusion is that 76 million ounces give or take a few million
ounces is a reasonable conservative estimate for silver demand
over its first 15 months. To arrive at this estimate, we have
simply taken the U.S. gold ETF market capitalization of a shade
under $6 billion and divided it by the annual $68 billion of
total gold demand. This works out to about 8.7% of annual gold
demand having been diverted into U.S. gold ETF vaults in the
last 15 months. Assuming the silver ETF were to attract the
same percentage of ETF demand versus annual total silver demand,
that would equate to the silver ETF reaching a market capitalization
of about $736 million in 15 months or, at today's prices, about
76 million ounces of silver.
Considering that total silver
investment demand was estimated in 2004 at only about 40 million
ounces, an incremental 76 million ounces could have a profound
positive impact on silver as it would eliminate at least 15%
of the world's identifiable above ground supply in what is already
a very tight market.
Finally, if you were to ignore
all of our ETF demand assumptions and look at the big picture,
you should be even more bullish. The fact is that the entire
dollar value of annual silver demand is peanuts. If SLV approaches
anything close to the popularity of the other ETFs, then silver's
run-up may be more spectacular than anyone can imagine.
January 28, 2006
Todd Stein & Steven McIntyre
Archives
Texas Hedge Report
Todd Stein
& Steven McIntyre
email: admin@texashedge.com
For more information, go to http://www.texashedge.com.
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