I'd like to use this thread to prompt a discussion among Turdites. First, please take a moment to read this email that I received earlier today. It is from a loyal reader "H.M.". H.M. posits that the recent activity within and depletion of SLV indicates a growing shortage of physical silver. He makes a compelling case:
My name is H.M. I enjoy reading your posts regularly. Your practical, objective, to the point, no non-sense, no BS approach is refreshing in today's investment world. It vindicates the real, main-street people.
Cutting to the chase, I would like you to comment, if possible in a specific post, on an observation that seems to indicate that, due to the extreme shortage of physical silver currently in the market, the bullion banks/Comex seem to be using desperate alternatives to attempt to meet their delivery obligations.
One such alternative is the redemption of physical silver through the SLV ETF (yes, it is possible! - if you have about $1.8 million).
SLV is not actively managed. It is designed to track the price of silver bullion held in the trust (supposedly). So, when you buy or sell shares of SLV you are not necessarily putting or removing pressure in the price of silver, it is not analogous to buying or selling the physical stuff.
And, contrary to what many people think, it is possible to take physical delivery, redeem silver from the SLV trust, in bullion equivalent to baskets of 50,000 shares, through an Authorized Participant.
On page 24 of the SLV prospectus, found on the iShares website:
"Authorized Participants, acting on authority of the registered holder of Shares, may surrender Baskets of Shares in exchange for the corresponding Basket Silver Amount announced by the trustee. Upon the surrender of such Shares and the payment of the trustee’s applicable fee and of any expenses, taxes or charges (such as stamp taxes or stock transfer taxes or fees), the trustee will deliver to the order of the redeeming Authorized Participant the amount of silver corresponding to the redeemed Baskets. Shares can only be surrendered for redemption in Baskets of 50,000 Shares each."
As of last Friday, 6/3/2011, the SLV closing price was $35.34, which means that the redemption basket of 50,000 shares at that instance in time amounted to $1,767,000 (plus applicable fees, expenses, taxes and charges, as it is stated in the prospectus).
The Authorized Participants are listed on page 23 of the same prospectus:
"As of the date of this prospectus, Barclays Capital Inc, Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, EWT, LLC, Goldman Sachs & Co., Goldman Sachs Execution & Clearing L.P., Intrade LLC, JP Morgan Securities Inc., Knight Clearing Services LLC, Merrill Lynch Professional Clearing Corp., Newedge Group USA, PruGlobal Securities, LLC, RBC Capital Markets, LLC, Scotia Capital (USA) Inc., UBS Securities LLC and Virtu Financial BD LLC are the only Authorized Participants."
So, one can think of a plausible scenario, one can presume that, in order to meet the delivery demands from clients, the Comex and the bullion banks are redeeming baskets of SLV through their buddies, the Authorized Participants.
To wit: in the Historical Data section of the SLV ETF website, it shows that, on 4/25/2011, the trust held 11390 tonnes of physical silver in the vaults. Merely 39 days later, on 6/3/2011, that tonnage had been reduced to 9885 tonnes.
A drop of 1505 tonnes in just over a month! This equates to a 13.2% drop in the stock of silver bullion supposedly then held by the SLV trust. (Incidentally, this begs the questions: was all this physical silver sold in the market? how and to whom all this selling was done?).
And, if I am not mistaken, this drop is also equivalent to one full month of the entire world silver production.
So, it seems someone is plundering SLV for a lack of better options to obtain physical silver in the marketplace. It may even be the cheapest alternative at this point in time for an institution under pressure to meet delivery commitments.
The above observations certainly seem to point in the direction of a growing premium in the days ahead in the price of physical over paper silver. In fact, this premium could explode higher in the not so distant future if this trend continues and the Comex is proven to be indeed in dire straits.
I would appreciate if you could comment on the above thoughts. Thanks in advance.
PS: And, just to make it crystal clear, that 13.2% drop in the tonnage putatively stored in the SLV vaults is actually bullish in my opinion. It shows stronger hands, I assume, are taking delivery of the metal, that is then taken out of circulation, stored away as a safe haven, in preparation for rainy days ahead.
Reading this reminded me of something that FOFOA wrote back in January. I did some googling and managed to find it. In the context of H.M.'s email, please take 5 minutes or so to read this:
In the end, there are several questions to ponder and discuss:
1) Are GLD and SLV being plundered for deliverable metal?
2) Are GLD and SLV being plundered by high net worth investors, seeking large quantities of metal?
3) Are we in a physical supply squeeze? If so, are we early in the event? The middle? The endgame?
4) If you own GLD and/or SLV, does this make you want to re-position out of them?
5) What are the best ways to diversify away from paper or synthetic metal?
Thank you all for participating in what has become the best precious metal blog and forum on the internet. Yes, I suppose that I have some input but it is you, my dear reader, who have made this site what it is. The new site now has its servers up and running and final preparations are being made. I really, really hope to have it ready for you by late next week.
Have a great and relaxing weekend! TF