Massive reduction in gold hedging reported for first quarter of 2006


By David Morgan
Wednesday, May 10, 2006

Many pundits have written about the silver ETF, and of course we
also had our say. We thought it best to put into the public record
our exact thoughts from the past as presented in our monthly reports
before commenting further. As the reader will determine we presented
some interesting points and we were not completely correct in our
opinions, but as usual did our best to present information that
would not only be useful to our subscribers but also give them pause
to ponder the longer-term implications.

From the December 2005 issue of The Morgan Report the following
was written:

"We have continued our investigation into the silver ETF and decided
to give our views both for and against. Originally we stated that we
thought the fund would be beneficial for the silver market, and we
still hold this view; however, more details are required behind our

"The first and most important fact to address is that the silver ETF
and all ETFs, to our knowledge, are cash-settled. This simply means
that the underlying asset may be there in various forms but the
investor in the fund can accept only cash as payment. This of course
is true of Central Fund of Canada, as we have mentioned previously.

"What the proposed silver ETF requires is real silver, but not
necessarily new purchased silver. In fact, the proposed amount for
this issue is about 130 million ounces of silver to begin. This is
almost exactly the amount reportedly purchased by Berkshire Hathaway
in 1997.

"We have absolutely no inside knowledge but wish to illustrate a
point. Suppose a large holder of real silver were to 'pledge' the
metal under some type of derivative scenario. The ETF would be up
and running, and real metal would be 'behind' the transaction.

"This would qualify and would not really cause any new silver
purchases to take place. So in effect new money would come into the
silver market but it would not necessarily require new silver to be
purchased. However, that would just be at the beginning, and if the
silver ETF showed the kind of participation the gold ETF enjoyed,
more and more real silver WOULD be demanded and this would be
difficult to supply at some point. So eventually new metal would be
required to back the ETF, and at that point the effect of a tight
supply should manifest in price pressure. However, the cash-
settlement process avoids any settlement problems.

"Currently, we think the ilver ETF will not be approved, and the
reasons will be that it is too small a market and gold is a unique
case. Gold has enough above-ground supplies and fairly wide market
breadth, unlike silver, which is a very tiny market. If we are
correct and this news becomes widespread, it should still help the
silver market, because those paying close attention may view this as
confirmation that silver supplies are indeed tight and new silver
purchases may take place.

"Another key factor is that some enterprising group or individual
might start a private fund with characteristics similar to the
proposed silver ETF. Barclays Capital could even start a silver ETF
outside of the U.S. markets without approval of the Securities and
Exchange Commission -- in Britain, for example.

"As the Texas Hedge article by T. Stein and S. McIntyre pointed out,
if the silver ETF turned out to be as popular as the gold ETF, it
would generate billions in demand. Each billion dollars in new
demand is equal to 125 million ounces in demand. Two or three
billion in today's world is nothing; each billion's worth of
purchases would equal the entire Comex supply. Several questions
remain, and we will continue to monitor the situation as it

* * *

Later in the April 2006 report we stated the following,

"Many times we have stated whatever is good for the gold market will
become good for the silver market. For example, James Turk had and worked only with gold, but GoldMoney now deals in
silver as well. The gold ETF was begun and we all know the silver
ETF is one step closer with the SEC approving the AMEX listing with
a rule change. Barclays now will submit a registration statement to
the SEC for approval. Once approved, the silver shares can begin
trading; this could happen in a few weeks or may take months. We
will have to wait and see.

"Opinions run the gamut. For example, Bill Murphy of the Gold Anti-
Trust Action Committee says, 'I am no fan of this ETF because
Barclays is behind it. Barclays has been the most notorious gold
bear for the last five years and has been WRONG for the last five
years. Even now they are calling for $350 gold within two years. I
don't trust them with this ETF any more than I can throw them.'

"Others see the silver ETF as a huge opportunity for both
institutional investors and individual investors to participate in
the silver market.

"According to the documentation, the silver ETF will be backed by
physical silver held in allocated accounts. The main question is:
How much silver will be bought through this vehicle?

"It is our guess that perhaps 25 million ounces of silver will be
required within a relatively short time once the iShares Silver
Trust shares begin trading. The gold ETF has about 15.5 million
ounces of gold currently. This is approximately $8.25 billion. Since
gold is much more accepted as an investment, we do not expect silver
to have the same amount of demand as gold, at least not initially.

"However, once established, interest in silver and silver investing
should pick up quickly; we see at least one-tenth of the amount of
money going into the gold ETF going into the silver ETF. This would
imply almost a billion dollars, which, at $10 silver, is equivalent
to 100 million ounces of silver, or 25 million more ounces of silver
than the bullion dealers have at the Comex (73 million in the
registered category).

"CPM Group has stated, 'One of the misunderstandings common in the
silver market is that there are hundreds of millions of ounces of
silver in inventories in London and Zurich. There is not nearly that
much. There may be between 75 million and 100 million ounces in
these bank vaults as of early 2006.'

We agree with CPM and think that between what Berkshire Hathaway
holds in London (100 million ounces?) and what the European banks
hold (another 100 million), maybe 200 million ounces of bullion
exist throughout Europe. No one is certain of the exact number or if
Warren Buffett still is holding silver, but we think he still does.

"The point is that silver is in tight supply and the silver ETF
should exert upward pressure on the price, especially as some gold
investors start to move into the silver ETF, either as spread
trading or outright new long positions.

"We picked up an interesting fact about the silver ETF while reading
the full document file. According to this filing, 'Authorized
Participants that wish to redeem a Basket of Shares will receive the
Basket Silver Amount in exchange for each Basket surrendered. JP
Morgan Chase Bank, N.A., London Branch, will be the custodian for
the Trust and responsible for safekeeping the silver.' This is
followed by Footnote 29.

"Footnote 29 says: 'If the total value of the Trust's silver held by
the Custodian exceeds $1 billion, then the Custodian will be under
no obligation to accept additional silver deliveries. In such a
case, the Trustee will retain an additional custodian.'

"This is a very interesting footnote. Basically, JP Morgan Chase is
going to be responsible for $1 billion worth of silver and that is
it. Again, what is $1 billion worth of silver at $10 per ounce? One
hundred million ounces -- approximately the amount we think could be
obtained in one fashion or another. We will continue to watch as the
silver ETF story unfolds.

"It is our understanding that long-term gains in the gold (silver)
ETFs would be taxed as collectibles at 28 percent, according to the
gold ETF prospectus. However, Ian McAvity pointed out that Central
Fund of Canada (CEF) is considered a passive foreign investment
company with shares not convertible into bullion. CEF is believed to
qualify as a PFIC to enable the 15 percent capital gains tax
treatment, which can be an important factor for investors."

* * *

Later in the April report we had this to say:

"Ted Butler brought out an interesting aspect of the proposed silver
ETF this month. Ted stated, 'Neither the SEC nor the Commodity
Futures Trading Commission nor any industry official has questioned
how these ETFs are an end-run around existing commodity regulation.
And that's especially true of the gold ETFs, which have been trading
now for a while."

"Ted went on to state, 'I think everyone overlooked the issue of no
limits or reporting of large positions in the commodity ETFs. That's
a shock to me.'

"Ted thinks there is a chance that someday the regulators will have
to rescind or somehow restrict the ETFs."

* * *

Now, on May 10, 2006, the silver ETF has 53,996,254 ounces of silver
in trust and is selling at a 4.5 percent premium. The silver ETF has
a current value of approximately $773 million, which means we are
already about three-fourths of the level beyond which Morgan Chase
will be "under no obligation to accept additional silver deliveries."

What will this mean for the silver market? What if physical demand
continues at the current pace?

The amount of physical silver put into trust from the silver ETF's
first day of trading to the present is nearly 54 million ounces of
silver. This is in less than 10 days of trading.

What will happen when the total value of the silver exceeds that $1
billion threshold?

Certainly these questions will provide many with material to keep
the silver market commentaries coming.

* * *

On Saturday April 6, 2006, we sent the following to our paid

"The news on silver continues to flow. We received the following
from a very close source at Warren Buffett's Berkshire Hathaway

"At Berkshire meeting now. ... He said they sold all silver. He said
he got in early and got out early. No sell price/date data given.
Says he would rather hold businesses that have earnings. He
thought 'copper and some other commodities" are in a bubble. Didn't
really talk about silver other than to say he sold it."

We want to thank this most trusted source and are almost certain
there will be some articles on the Internet soon.

Many have commented that it is nearly impossible to deliver the
amounts of physical silver into the vaults without taking the silver
already resting in place. Berkshire Hathaway's silver was in London
and Barclays' silver ETF is in London. Is it the same silver?

Take a guess.


David Morgan is editor of The Morgan Report (www.silver- and contributor to Mining Industry Review, an e-TV
program sponsored by He also hosts a weekly
metals wrapup each week on the "Financial Sense News Hour":


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