Silver Squeeze

Kevin Morrison wrote an excellent article in the Financial Times Market Insight: The squeeze is back on the silver market (subscription required).

Morrison discusses the potential effect of the Barclays Global Investors iShares Silver Trust (Silver Exchange Traded Fund ETF). He goes on to write the following.

However, Yingxi Yu, precious metals analyst at Barclays Capital, says so far this month there has been a net purchase of gold ETFs equivalent to 5.74 tonnes of the metal, down from 19.27 tonnes in February, and dramatically down on January’s 87.54 tonnes.

Ms Yu says the five-listed gold ETFs have attracted demand equivalent to about 470 tonnes of gold, or about 12 per cent of annual gold demand. For silver to command the same success, it would need to attract demand equivalent about 110m ounces.

Mr Reade says unlike gold, silver does not have an abundance of above ground stocks - gold inventories equate to just under 40 years of demand and silver equates to less than a year. He says strong demand for silver ETFs would reduce the amount of silver available to lend to consumers or traders, and in turn could push up leasing rates and in turn cause silver prices to move even higher.

“The silver market is not deep enough to withstand a large inflow of investment, making it vulnerable to a potential price spike,” says Mr Reade.

The last portion of the quoted article is important, Mr Reade says unlike gold, silver does not have an abundance of above ground stocks - gold inventories equate to just under 40 years of demand and silver equates to less than a year. Thus, I do not subscribe to the theory that once the ETF is formally approved, the speculative money will leave silver and it will return to its prior price. Instead, I believe that the supply demand picture for silver is becoming more bullish for those holding silver.

Bill Fleckenstein at Fleckenstein Capital, a subscription site, is very bullish on silver. I should note that he is also a director at Pan American Silver Corp. (PAAS) and that I am long PAAS stock.