The Hindu Business Line : Shine in silver seen continuing in short term

Bright horizon
Silver may vault to $12 an ounce once iShares get listed
Weak dollar to support sentiment
$9.50 seen as key support level

Chennai , March 26

Where is silver that hit a 22-year high of $10.70 an ounce last week heading to? Investors looking for an answer to this question can stay invested in the white metal. Short-term indicators for it are positive.

Silver hit a record $50 in 1980 when a conflict between the US and Iran looked imminent. This time, too, the US and Iran are at loggerheads but with Russia and China playing an active role in the UN, the situation is unlikely to go out of hands. Then, the dollar fell sharply but, thankfully, this time it has not fallen that steep.

Primary force

Silver usually toes gold and most of its gains during 2005 could be attributed to this factor. But this year, it has outshone gold. A primary factor for this rise has been Barclays Global Investors move to offer 13 million shares of `iShares Silver Trust', an exchange traded fund (ETF) whose price will depend on the metal's price. The listing of iShares, backed by an arrangement to hold 129 million ounces of silver, has becoming a near reality. Last week, Barclays got the US Securities and Exchange Commission's (SEC) formal nod for iShares, seen as partial approval of the much-anticipated fund.

The SEC posted an order on its Web site last Tuesday allowing the listing and trading of shares of iShares on the American Stock Exchange (Amex). The order, however, only brings the iShares one step closer to approval. There is a registration statement for the transaction by which iShares will be offered to the public and it has to be reviewed and declared effective. This has yet to take place.

During the comment period on Barclays offer, SEC received 255 letters on the proposed rule change allowing the silver ETF. Of this, 248 comments were in support and 7 against.

Removing barriers

iShares are similar to Barclays gold ETFs and Street Tracks Gold Trust. The iShares Silver Trust will hold the precious metal in an account with JP Morgan Chase in London. Each share will represent 10 ounces of silver, and the price will be based on the London fix.

Supporters of the iShares, including The Silver Institute, say a silver-backed ETF would make investing easy and convenient and eliminate barriers to trading in the physical metal.

Since Barclays will hold the metal, investors do not have to take physical delivery and pay for storage, insurance and assaying costs. Further, supporters say such an ETF would provide added transparency and integrity to the silver market.

Once iShares get listed, it is possible that silver may vault to $12 an ounce and even higher. However, there is a section of the trade that feels some selling could take place once they get listed. What makes supporters of iShares optimistic is that the similar fund in gold helped producer selling and, in turn, create investor demand.

Opposition

However, there is a stiff opposition to the creation of the silver ETF. Mainly, the Silver Users Association, a non-profit lobby group interested in keeping an orderly silver market, has led the opposition. Those opposed to the fund, in general, have argued that approval of the ETF would result in serious liquidity problems in the silver market. Additionally, they claim that higher silver prices caused by the creation of the ETF could cause loss of jobs specific to the silver industry.

A derivative product

But supporters of the ETF say like other derivative products, the fund would increase the efficiency and transparency of the silver market. It was one of the reasons for SEC to give its approval in public interest and rule out problems of serious liquidity in the silver market.

The 129 million ounces to be held in the fund makes up roughly 16 per cent of the global annual silver production and 21 per cent of the known above-ground inventories, according to investment bank Salman Partners. iShares, potentially, could drive up silver prices more than it has already, perhaps even squeezing the market. Salman Partners, therefore, has raised its forecast for silver prices in 2007 to $11 an ounce from $7.75. It says prices could top $12 over the next two years.

Market signals

Short-term signals in the market are positive as the prices are at multi-year highs. Open interests in the metal are higher than the normal 75,000 contracts at 1.33 lakh contracts, though they are lower than 1.58 lakh contracts in November last. The weak dollar is another factor that, in general, could aid the precious metals. The higher number of open interest makes silver prone to volatility.

Apart from other indicators, the price chart for May shows a positive and clear uptrend. However, investors will have to watch out for the key support level of $9.50.

Once the prices dip below this, there could be a reversal of fortunes.

Fundamentals

The demand-supply fundamentals for silver reveal interesting facts (see Table). Since 2000, demand for the metal has declined by over 80 tonnes, while supply has increased by about 50 tonnes. Fall in demand can be attributed due to decline in offtake by the photography sector (12 per cent) and for making coins (9 per cent). The photography sector is undergoing a sea change with digital cameras becoming the in-thing. However, a buoyant global economy could see increase in demand for jewellery and silverware and industrial fabrication.

Last year, silver demand in industrial fabrication is estimated to have increased six per cent, while for jewellery and silverware, it is projected to have risen by 14 per cent. India is seen as a prime mover behind this with demand increasing rapidly and imports doubling up to September last.

GFMS feels demand for industrial fabrication, jewellery and silverware could make up for the loss in the photography sector. It also sees a fall in supply from scraps due to decline in photographic recovery. As of now, investment in silver is seen safe.