A Sterling Account of Silver's January, 2010 Dismal Performance

by Rob Kirby, Kirby Analytics. February 8, 2010

From Mark Leibovit’s most recent VR Gold Letter:

In the news, we learned that demand for precious metals weakened substantially in January. The world's largest gold-backed exchange-traded fund, New York's SPDR Gold Trust (GLD), said its holdings fell 21.7 tons or 1.9 percent in January. The largest silver-backed fund, the iShares Silver Trust (SLV), saw a 107.99 ton or 1.1 percent decline in its holdings last month.

The US Mint sold a record $1.7 billion of gold, silver, and platinum bullion in 2009, a 79 percent increase from 2008. The Mint turned a profit of $32.7 million from the bullion sales, an 84 percent increase.

When one takes a moment to read the prospectus of SLV, it states that the fund’s purpose is to provide an investment “similar to an investment in silver” i.e., it is a derivative instrument:

“The objective of the trust is for the value of the iShares to reflect, at any given time, the price of silver owned by the trust at that time less the trust’s expenses and liabilities. The iShares are intended to constitute a simple and cost-effective means of making an investment similar to an investment in silver. An investment in physical silver requires expensive and sometimes complicated arrangements in connection with the assay, transportation, warehousing and insurance of the metal. Traditionally, such expense and complications have resulted in investments in physical silver being efficient only in amounts beyond the reach of many investors. The iShares have been designed to remove the obstacles represented by the expense and complications involved in an investment in physical silver, while at the same time having an intrinsic value that reflects, at any given time, the price of the silver owned by the trust at such time less the trust expenses and liabilities. Although the iShares are not the exact equivalent of an investment in silver, they provide investors with an alternative that allows a level of participation in the silver market through the securities market.”

Note the ambiguity in the legalese, “an investment similar to an investment in silver”. SLV iShares goes on to try to distance themselves from the COMEX silver complex and void themselves from transparency obligations one might expect consistent with prudent regulatory oversight:

“The trust will not trade in silver futures contracts on COMEX or on any other futures exchange. The trust will take delivery of physical silver that complies with the LBMA silver delivery rules. Because the trust will not trade in silver futures contracts on any futures exchange, the trust will not be regulated by the CFTC under the Commodity Exchange Act as a “commodity pool,” and will not be operated by a CFTC-regulated commodity pool operator. Investors in the trust will not receive the regulatory protections afforded to investors in regulated commodity pools, nor may COMEX or any futures exchange enforce its rules with respect to the trust’s activities. In addition, investors in the trust will not benefit from the protections afforded to investors in silver futures contracts on regulated futures exchanges.”

In actuality, SLV iShares are reflective of the price of “paper silver” as expressed on New York’s COMEX exchange. Lack of transparency in the custody and audit arrangements of the trust raise questions whether SLV is truly, fully backed by physical bullion.

Now, speaking to the notion that a reduction in reported iShare SLV silver inventory represents a decrease in demand for precious metals, I’d like to compare the Jan. 2010 experience of another precious metal fund with that of SLV.

The BMG Bullion Fund [Toronto, Canada based] invests in physical gold, silver and platinum bullion ONLY. The BMG bullion fund’s prospectus is unambiguous and extremely transparent regarding the custody and audit of metal it possesses. For Jan. 2010 the BMG Bullion Fund [data obtained directly from the company] had a NET INFLOW of 2.36 million dollars on a fund with an average Jan. market cap of 298 million dollars.

Ladies and gentlemen, the experience of the BMG Bullion Fund mirrors the experience of the U.S. Mint with Silver and Gold American Eagles, clearly showing that demand for physical precious metal INCREASED DURING JAN. 2010.

While the price of silver was admittedly weaker in January 2010, the notion that physical demand was actually weaker also flies in the face of what is being empirically reported by the U.S. Mint. When we check in with the U.S. Mint to see how sales of precious metals have been going thus far in 2010, we can see that:

US Mint Sales: 2010 American Silver Eagles Break Record
January 27, 2010

Demand during the last several days has declined for all United States Mint silver products, according to the latest sales stats.

Still, investors and collectors this month have given more than enough attention to the newly released bullion 2010 American Silver Eagle coins. January sales are at an all-time, record-smashing high.

3,225,000 of the 2010-dated bullion silver coins have been sold as of today. Combined with the 2009-dated sales of 367,500 from earlier this month, US Mint authorized buyers have now purchased a total of 3,592,500 Silver Eagle coins -- the most ever in a January, dating way back to the series launch in 1986. That, in spite of sliding silver prices, rationing and a week of unavailability between the time the 2009s sold out and the 2010s became available.

For a perspective of how significant the numbers are, only one January (2008) has ever had more than two million eagles sold, which is a far cry from this month's already 3.5M+. More on this topic may be read from an article published earlier this week on parent site CoinNews.net entitled US Mint Silver Eagle Sales Top 3 Million, Best Ever January…

The OVERWHELMING RECORD demand for Silver American Eagles is inconsistent with the statement that demand for precious metals has weakened. Further, Silver American Eagles trade at a significant premium to spot and reflect that physical bullion trades at a premium to the paper price:

Chart compliments of: CoinNews.Net

The charts below illustrate that virtually “all” of the weakness / sell-offs in the price of silver that occurred in Jan., 2010 occurred on the COMEX [American] exchange during New York trading hours:

How Silver Trades

Traditionally, most global precious metals trading takes place on recognized exchanges where derivatives [futures] contracts serve as proxies for the underlying physical metal. These “paper” [digital actually] contracts are supposed to represent a price discovery mechanism for the underlying commodity.

Price Discovery: A method of determining the price for a specific physical commodity or security through basic supply and demand factors related to the market.

There is little dispute that world silver mines produce roughly 600 million ounces of silver per year:

600 million ozs x 16.00 per oz = 9.6 Billion Annual Global Production [Physical SUPPLY]

Consider the following reconciliation of the global, annual amount of silver mined versus the amount of synthetic “paper” silver being sold on metals exchanges. We can approximate the aggregate value of silver ounces sold in paper form by examining published data from the Bank for International Settlements [BIS] in their semi-annual derivatives reports:

Source: BIS pg. 9 of 23 pdf doc.

From the BIS data above [assuming 90% of 646 Billion “other” is silver] we can deduce that outstanding paper sales of silver in the first half of 2009 totaled 581 Billion in value. From this we can deduce that for every physical ounce of silver that was mined from the earth’s crust in 2009 – it was sold [581 / 9.6 = 60.5] over 60 times in paper form. Sadly, it is manufactured volume of “phantom” paper sales contracts that DETERMINE the price of new physical ounces being mined from the ground. This makes a complete mockery of the notion that “futures” are supposed to aid in price discovery of the underlying commodity.

What we can take away from this is that precious metals futures have been utilized to create artificial price suppressive supply in the market place.

Why Is the Price of Silver Being Fire-Bombed During New York Business Hours?

We do know that the extreme selling witnessed on COMEX is inconsistent with the demonstrated RECORD demand for Silver American Eagles. We also know that the U.S. Mint has suspended sales of both Silver and Gold American Eagles on numerous occasions over the past couple of years.

US Mint Suspends Production of More Gold and Silver Coins
March 14, 2009

The United States Mint has officially announced the suspension of another slate of gold and silver products. The affected products are 2009 dated American Gold and Silver Eagle coins produced for collectors. These coins are considered collectible versions of the bullion coins.

Although these are collectible coins, they represent a sizable amount of precious metals sales and represent a method of gold and silver investment for many individuals. Last year, the US Mint sold 1,157,911 ounces of silver in the form of Silver Eagle coins minted for collectors. They also sold 155,740 ounces of gold in the form of Gold Eagle and Gold Buffalo coins minted for collectors…

And,

US Mint Suspends Sales of Gold and Silver Eagle Coins
November 25th, 2009

The United States Mint has suspended sales of their popular one ounce American Gold Eagle and one ounce American Silver Eagle bullion coins. The suspension was announced in a memo sent to the US Mint's authorized bullion purchasers…

Contrary to reports stemming from mainstream analysts that January 2010 price drops imply that demand for silver is waning, it is very likely AND consistent with empirical observations that demand for PHYSICAL PRECIOUS METALS [SILVER] actually increased and they are actually in short physical supply.

When one stops to consider that documentation has been amassed for YEARS by organizations like GATA, showing that the price of silver [and gold] has been surreptitiously “capped” principally by the Federal Reserve / U.S. Treasury for years, the evidence of collusive silver price suppressive activity during New York business hours makes even more sense. Could it mean that the Fed / U.S. Treasury is losing their global influence in garnering the active / willing participation of the Bank of England in drubbing the London Bullion Market and must now do so exclusively during New York business hours?

The spendthrift U.S. Government has a vested interest in defending the irredeemable U.S. Dollar – the world’s reserve currency – whose value is literally “faith-based”, backed by nothing and a debt obligation of the U.S. Government. With the U.S. Treasury’s funding requirements expected to be in the neighborhood of 3.5 Trillion over the next 12 months, it’s not surprising the U.S. Treasury / Fed would be engaged in nefarious price suppression of silver – a superb, historic store of wealth which just happens to be Constitutionally Mandated Money.

Today’s Market

Overseas equity markets began the week on a negative note with Japan’s Nikkei Index falling 105 points to 9,951. North American markets ended the day in the red as well with the DOW off 103.80 to 9,908.40, the NASDAQ down 15.07 to 2,126.05 and the S & P losing 9.45 to 1,056.75. NYMEX crude oil futures gained .47 to end the day at 71.66 per barrel.

On foreign exchange markets the U.S. Dollar Index added .10 to 80.32.

In the interest rate complex the benchmark 5 yr. government bond finished the day at 2.24% while the 10 yr. bond ended the day at 3.57%.

Precious metals finished the day solidly in the red with COMEX gold futures falling 3.20 to 1,062.80 per ounce while COMEX silver futures lost .16 to 15.03 per ounce. The XAU Index lost 4.60 to 149.65 while the HUI Index gave up 14.47 to 374.96.

On tap for tomorrow, at 10:00 a.m. Dec. Wholesale Inventory data is due – expected -.3% vs. prior +1.5%.

Wishing you all a pleasant evening!

Rob Kirby

© 2010 Rob Kirby

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