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Making Sense of Silver ETFs

November 22nd, 2016 by

Silver prices have been pummeled since the beginning of October, shedding over 15% from their peak this year above $20 per ounce. As a result, the silver exchange-traded funds (ETFs) that track the silver price have also fallen sharply from their highs earlier this autumn.

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What does 2017 hold in store for silver ETFs? Moreover, do these funds actually offer any advantages in comparison to directly buying physical silver?

SLV, SIVR

The two leading silver ETFs are the iShares Silver Trust (SLV) and the ETFS Physical Silver Shares (SIVR). They make up a large chunk of the silver ETF market, much like their counterpart in gold, the SPDR Gold Trust (GLD). Other popular precious metal ETFs are leveraged, meaning they provide returns that are multiples (typically three times) of the underlying metal price they track.

While SLV and SIVR both are explicitly intended to mimic the returns of owning silver bullion (less the security’s fees, of course!), the fact that these trusts hold silver as an asset doesn’t mean you can necessarily redeem shares for physical silver. Instead, any shares you sell are settled in cash.

This is major trade-off with SLV and SIVR: They are more convenient for investors to establish large positions and don’t require you to store actual metals or find a custodian; however, they also don’t offer the tangible assurance of physical precious metals. In this way, they are really no more of a safe haven in times of turmoil than any other stock or security.

Rising Debt, Limited Supply

Two factors to consider that work in favor of silver investments in 2017 are a potentially limited supply and a global crisis in creditworthiness.

There is—generally—an inverse relationship between levels of global debt and the precious metal prices, roughly speaking. When the solvency and stability of the world’s financial system comes into question, in this case under the weight of mounting debt, gold and silver are the most obvious beneficiaries.

The example in recent memory is the way that worried investors piled into the gold and silver ETFs when the financial crisis hit in 2008. In the aftermath of this episode, the national debt of the U.S. has exploded to nearly $20 trillion. This says nothing of other major economies, such as Japan, which is saddled with debt that amounts to more than three times its annual GDP.

Just keep in mind that precious metal prices generally do well as debt rises.

The dwindling supply of new silver would also place upward pressure on prices. According to analysis by ETF Daily News, “the cost of [silver] production is increasing rapidly and the ore quality is declining.” A tighter supply coupled with a foreseeable gradual increase in silver demand—whether for investment or industrial purposes—is a formula for rising silver prices in 2017.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.