Ted Butler: The learning curve

Section:

By John Spence
CBSMarketWatch
Tuesday, April 4, 2006

http://www.marketwatch.com/News/Story/Story.aspx?guid=%7B93A43D8B%
2DC95D%2D46E3%2DB098%2D843BD6D55D61%7D&siteid=mkwt

BOSTON -- A highly anticipated exchange-traded fund tracking silver
prices may usher in a correction from multidecade commodity highs if
it follows the pattern of gold ETFs, analysts say.

Although the silver ETF has yet to gain final regulatory clearance,
precious-metal traders are eagerly awaiting the fund in registration
from Barclays Global Investors. Some are speculating it could launch
as early as this week on the American Stock Exchange after silver
prices reached a 22-year high of $11.815 an ounce Monday.

Analysts, though, say the introduction of the silver ETF could
actually set up a price pullback in the days and weeks following the
start of trading.

There are already seven ETF-like products listed on exchanges in the
U.S., the U.K., Australia, and South Africa that track gold prices,
and the launches have been marked by an interesting trend, according
to J.P. Morgan analyst Anindya Mohinta in London.

The most successful gold ETF launches were Gold Bullion Securities
on the London Stock Exchange in December 2003, and StreetTracks Gold
Trust in November 2004 on the New York Stock Exchange. For example,
investors put an estimated $550 million into the StreetTracks Gold
Trust on its first day of trading, and the fund currently houses
over $6 billion.

Mohinta found gold prices rose by up to 12% in the 90-day periods
leading up to the ETF launch dates, only to fall between 7% and 10%
in the corresponding period after the listing date.

So far in 2006, through Monday's close, silver futures are up more
than 32%, fueled in part by the ETF talk.

If approved by regulators, the silver ETF would be backed by silver
held in a vault, which matches the set-up of existing gold ETFs.
Barclays has filed to issue 13 million shares of the silver ETF,
with each share representing 10 ounces of the metal. This requires a
physical backing of 130 million ounces of silver, or 12% of the
global physical demand and equal to the silver inventory on the New
York Mercantile Exchange, according to J.P. Morgan.

Mohinta said he doubts that the entire 13 million-share allocation
will immediately sell out, pointing to the common practice of using
mining stocks such as Pan American Silver Corp. to get exposure to
silver without holding the physical metal. Stocks have the added
benefit of dividends, he added.

"Larger, more sophisticated players already have an abundance of
investment alternatives" such as futures and options contracts to
invest in silver and other commodities, noted Tim Evans, senior
analyst at IFR Markets in New York.

Precious-metals prices are also notoriously volatile and given to
wide performance swings.

Evans said the rush of commodity ETFs such as the silver fund does
have a tendency to trigger euphoria, but "their introduction quite
often occurs at market tops, bringing small investors into markets
they don't fully understand at just the wrong moment."

"While silver can get to $15 or $20 before it's all said and done,
the actual launching of the silver ETF could mark a short-term top
for silver," added Peter Grandich, editor of the Grandich Letter,
noting that the silver ETF could represent a "buy the rumor, sell
the news" trade.

Analysts are also warning about potential confusion over the tax
structure of precious-metals ETFs. Under current tax law, long-term
gains from the sale of silver are taxed as "collectibles" like
artwork. Therefore, if held for more than a year, gains on the
silver ETF would be taxed at a maximum rate of 28%, compared with
15% for so-called long-term gains on stocks. If sold in less than a
year, gains are taxed as ordinary income.

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----------------------------------------------------

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