One of my most reliable sources of inside information stated in an interview a couple days ago that Asian buyers are having such great difficulty locating physical silver to purchase that they are now purchasing shares of the SLV silver exchange traded fund (ETF). The plan is to acquire the minimum of 50,000 shares at a time that can then be presented to SLV to redeem for almost 500,000 ounces of physical silver.
One of the provisions of the gold and silver ETFs is that large quantities of shares can be redeemed for the physical metal when presented by authorized parties. The authorized parties are generally the world’s largest brokerage firms and banks.
The source also indicated that Asian buyers have been engaging the same tactic with gold ETFs in order to obtain physical gold. This could be the explanation for the significant reduction in outstanding shares of the GLD ETF in the past two months.
There is some concern that SLV does not possess sufficient physical silver to cover redemption of all of its outstanding shares. Instead, some of the metal may be out on lease and some may be covered by paper promises to obtain delivery someday in the future. While it is highly unlikely that such a high percentage of shares might be redeemed quickly to force this issue, it would only take redemption of 10-20% of shares to start some panic scrambling by other SLV owners to get out of their holdings.
This source is a London trader whose name I do not even know. I don’t even get the information first hand. He was the one who tipped me off in 2003 that it looked like the Chinese government was adding to its gold reserves without publicly acknowledging it. It turned out that over six years later that the Chinese finally revealed that they had been adding gold reserves since 2003.
To the extent that this information is accurate, my projection of silver spot prices reaching $38 to $45 by the end of March could be too low. Stay tuned for developments.
Patrick A. Heller owns Liberty Coin Service in Lansing, Michigan and writes “Liberty’s Outlook,” a monthly newsletter covering rare coins and precious metals. Past issues can be found online at http://www.libertycoinservice.com/ Pat Heller is also the gold market commentator for Numismatic News. Past columns online at http://numismaster.com/ under “News & Articles”. His bimonthly columns on collectibles can also be read at http://www.lansingbusinessmonthly.com under “Articles” and “Department Columns.”His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com.