Pros and Cons of iShares' Silver ETF

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The target market for SLV is stock traders who haven’t owned physical silver yet. It is like a gateway drug for them. I’ve heard from many investors over the last four years who started out owning a little GLD or SLV and “graduated” into buying bullion.

On April 28th, 2006, Barclays launched the first silver exchange-traded fund in the US. Traded on the AMEX, the iShares Silver Trust (SLV) was eagerly anticipated by silver investors ahead of its birth. It ushered in a new era where vast pools of stock-market capital gained an easy conduit into the physical silver market.

...The Silver Users Association opposes the creation of a silver ETF because of the concerns that doing so will require the holding of physical silver in allocated accounts, thus removing large amounts of silver from the market.

With SLV generating some controversy lately among a small subset of contrarian investors, remembering how aggressively the silver industrial consumers opposed it prior to its launch is illuminating. The SUA was terrified of stock investors gaining easy access to silver and driving a huge silver spike. It said “the proposed silver ETF could be a legal way for investors to squeeze the silver market.” The SUA knew the silver ETF would take a huge pile of physical silver bullion off the markets, driving up prices.

Just over two years later, the SLV silver ETF has been a major success. It has given non-traditional silver investors in the stock markets an easy way to gain silver exposure in their usual stock-trading accounts. Stock-market capital shunted into the silver market via this ETF has pulled a vast amount of silver off the markets, as the SUA feared. And today with years of trading history under its belt, there is finally enough data to analyze SLV’s impact.

I’ve been a big fan of commodities ETFs since 2002, two years before the launch of the gold ETF (GLD) and four years before SLV was born. Despite this, I will probably never invest in either GLD or SLV, although I will use them as short-term trading vehicles to speculate. Why? I am a physical guy. When I buy gold and silver to undergird my own investment portfolio, I want physical bullion coins held in my own immediate physical possession. To me, everything else is inferior paper.

A lot of hardcore contrarians feel this way, they wouldn’t touch SLV with a ten-foot pole. And this is fine, as SLV is not designed for traditional buyers of silver bullion. The target market for SLV is stock traders who haven’t owned physical silver yet. It is like a gateway drug for them. I’ve heard from many investors over the last four years who started out owning a little GLD or SLV and “graduated” into buying bullion.

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