Physical v ETF in Silver

Posted | 20/05/2015 / Views | 2936
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A few weeks back we reported on silver analyst Ted Butler’s assertions that JP Morgan have amassed an incredible 350m oz physical position in silver.  The quote below follows on from that and we post it unedited for your consideration.  For us, whether you agree with Ted or not, this trend is important to know for those considering ETF’s for precious metals over owning the real thing.  These facts should give cause for alarm for anyone in ‘paper’ silver and gold.  Over to Ted…

“Once again, the standout physical development [last week] was what occurred in the big silver ETF, SLV. After a one million oz deposit to start the week, close to 4.5 million oz were withdrawn from the trust (on Thursday and Friday). Particularly in light of the very high trading volume, mostly on Wednesday but extended into Thursday, the two days in which silver prices advanced the most, the big withdrawals must be considered shocking. I’ve been using the word counterintuitive to describe the unusual metal withdrawals from SLV on price strength and deposits on price weakness for a number of years now, but once again, that description is inadequate. Interestingly, the shocking two day withdrawal in SLV connects many things I’ve discussed recently, including my speculation that JPMorgan has amassed a mountain of physical silver.

Because of the unique open-ended feature of SLV (and GLD), when there is net new investor buying in SLV that causes the price to rise, the prospectus dictates that actual new metal must be deposited that day to match the amount of new net investor buying of shares. (Short selling may frustrate and prevent the deposit of new metal, but wouldn’t result in a withdrawal of metal.) To keep it simple – net new investor buying in SLV causes the price to rise and requires the appropriate amount of new metal be deposited to back up the newly created shares. If there wasn’t net new investor buying to begin with, it is very unlikely that prices would have risen, particularly on a repeated basis (as has been the case in SLV for the past few years). Therefore, even though I am the only one raising this issue, any observer of the silver scene should be asking out loud – how the heck can there be a massive withdrawal of metal in SLV on a high volume price advance.

Who would undertake such an unusual trading approach of buying shares in SLV and immediately converting those shares into metal and why? The only explanation I can come up with is a large entity seeking to accumulate silver without the accumulation becoming widely known. If the newly purchased shares of SLV weren’t quickly converted into metal then it would quickly be revealed by SEC reporting requirements for acknowledging large share ownership (over 5%). Leave it in the form of accumulated shares and the buyer would soon need to reveal ownership; convert the accumulated shares to metal and no revelation is required.  I continue to believe that the large buyer of shares of SLV which is quickly converting those shares into metal is JPMorgan.”