You are here

Ted Butler: The learning curve

Section: Daily Dispatches

By John Spence
Tuesday, April 4, 2006

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.


To subscribe to GATA's dispatches, send an e-mail to:

To unsubscribe, send an e-mail to:

Caution: America Online prohibits delivery of GATA
dispatches to AOL e-mailboxes.



Free sites:
(Korelin Business Report -- audio)
(In Spanish)
(In English)

Subscription sites:

Eagle Ranch discussion site:

Ted Butler silver commentary archive:



Blanchard & Co. Inc.
909 Poydras St., Suite 1900
New Orleans, Louisiana 70112

Centennial Precious Metals
Box 460009
Denver, Colorado 80246-0009
Michael Kosares, Proprietor

Colorado Gold
222 South 5th St.
Montrose, Colorado 81401
Don Stott, Proprietor

El Dorado Discount Gold
Box 11296
Glendale, Arizona 85316
Harvey Gordin, President
Office: 623-434-3322
Mobile: 602-228-8203

Gold & Silver Investments Ltd.
Mespil House
37 Adelaide Rd
Dublin 2
+353 1 2315260/6
Fax: +353 1 2315202

Investment Rarities Inc.
7850 Metro Parkway
Minneapolis, Minnesota 55425
Greg Westgaard, Sales Manager
1-800-328-1860, Ext. 8889

178 West Service Road
Champlain, N.Y. 12919
Toll Free:1-877-775-4826
Fax: 518-298-3457
620 Cathcart, Suite 900
Montreal, Quebec H3B 1M1
Fax: 514-875-6484

Lee Certified Coins
P.O. Box 1045
454 Daniel Webster Highway
Merrimack, New Hampshire 03054
Ed Lee, Proprietor

Lone Star Silver Exchange
1702 S. Highway 121
Suite 607-111
Lewisville, Texas 75067

MRCS Canada
12303-118 Ave. NW
Edmonton, Alberta T5L 2K2
Michael Riedel, Proprietor

Miles Franklin Ltd.
3015 Ottawa Ave. South
St. Louis Park, Minn. 55416
1-800-822-8080 / 952-929-1129
fax: 952-925-0143
Contacts: David Schectman,
Andy Schectman, and Bob Sichel

Missouri Coin Co.
11742 Manchester Road
St. Louis, MO 63131-4614

Resource Consultants Inc.
6139 South Rural Road
Suite 103
Tempe, Arizona 85283-2929
Pat Gorman, Proprietor
1-800-494-4149, 480-820-5877

Richard Nachbar Rare Coins
5820 Main St., Suite 601
Williamsville, N.Y. 14221-8232

Swiss America Trading Corp.
15018 North Tatum Blvd.
Phoenix, Arizona 85032
Dr. Fred I. Goldstein, Senior Broker

The Moneychanger
Box 178
Westpoint, Tennessee 38486
Franklin Sanders
1-888-218-9226, 931-766-6066



If you benefit from GATA's dispatches, please
consider making a financial contribution to
GATA. We welcome contributions as follows.

By check:

Gold Anti-Trust Action Committee Inc.
c/o Chris Powell, Secretary/Treasurer
7 Villa Louisa Road
Manchester, CT 06043-7541

By credit card (MasterCard, Visa, and
Discover) over the Internet:

By GoldMoney:
Gold Anti-Trust Action Committee Inc.
Holding number 50-08-58-L

Donors of $200 or more will receive copies
of "The ABCs of Gold Investing" by Michael
Kosares, proprietor of Centennial Precious
Metals in Denver, Colorado, and "The Coming
Collapse of the Dollar" by James Turk and
John Rubino.

GATA is a civil rights and educational
organization under the U.S. Internal Revenue
Code and contributions to it are tax-deductible
in the United States.