BUSTING MORE SILVER ETF MYTHS
by Tom Szabo
September 19, 2007
Some critics of Barclays' silver Exchange Traded Fund (ETF), traded on the AMEX under the symbol 'SLV', have long urged their followers -- and anyone else who would listen -- to avoid this ETF because it is allegedly not backed by silver bullion as promised but rather by futures contracts or other forms of "paper silver". A close examination of these allegations, however, shows they are flimsy at best: not only is the ETF audited by the world's largest and most prestigious accounting firm, but its custodial controls, trust agreement and structure are based on industry standards. There are plenty of good reasons to favor a direct investment in silver (bullion held in your own possession) -- and vice versa -- but concerns about the quality of SLV's silver backing is not among them.
Today, I'd like to tackle a new wrinkle in the SLV bashing saga, an allegation that is wilder yet easier to cut down than those which came before it. This latest "rumor" abuses people's inherent fears about the collapse of the banking system as recently demonstrated by Northern Rock customers waiting in blocks-long lines to get their money out of the liquidity-strapped, U.K.-based mortgage bank. Supposedly, Barclays Bank is following in Northern Rock's bankruptcy bound footsteps because it too was recently forced to borrow money from the Bank of England (although this episode was blamed on a computer glitch and not liquidity problems at U.K.'s third largest commercial bank). Since SLV is part of the Barclays empire, it stands to reason that the ETF's silver might be used to pay the bank's general creditors, leaving SLV investors holding the bag.
Fortunately, such "logic" represents but another misunderstanding of the silver ETF's structure. You see, Barclays does not operate SLV, nor does it (or its creditors) hold or have access to the silver held in trust on behalf of SLV. These instead are the duties of the Bank of New York as Trustee and JPMorgan Chase Bank as Custodian, respectively. Barclays is merely the sponsor and issuer of the SLV in the very same sense that the World Gold Council is the sponsor and State Street Bank is the issuer of the streetTRACKS Gold ETF, GLD. Barclays is paid a fee for sponsoring and issuing SLV, but has neither assets nor liabilities associated with the ETF (though it has obligations, such as filing required forms with the SEC). Then there is this question: which "Barclays" are we talking about? Barclays Bank Plc is presumably the one in trouble but the ETF is actually sponsored by a U.S. subsidiary, Barclays Global Investors N.A., which is the world's largest institutional investment management firm. Furthermore, even if Barclays Bank and its U.S. subsidiary were completely dissolved, it is probable that a replacement sponsor would be found for SLV. After all, the iShares "brand" is quite valuable and unlikely to be left without a buyer. Heck, I'd personally pay at least one dollar for it! The alternative would mean quite a big problem for the silver market indeed, as 140 million ounces of silver (or whatever amount is actually there if you don't believe the ETF is fully backed by bullion) would quickly need to find new buyers.
Those who see a liquidation of SLV as a realistic possibility should sell all of their silver now, whatever the form, and plan to buy back after the SLV liquidation has clobbered the silver price. Everyone else should be weary of those who tell you to switch to a direct investment in silver bullion on the basis that the silver ETF is about to collapse. After all, SLV is infinitely easier to buy and sell, which could become a very important consideration during precisely the type of liquidity crisis the ETF's detractors are using to justify their advice to shift your silver holdings into a less-liquid form! Don't get me wrong, I am not saying that SLV is an appropriate form of silver ownership for every investor. In fact, I've been the most vocal opponent of such an irresponsible premise. No, what I'm saying is that you should judge the appropriateness of SLV for your portfolio on the basis of real considerations, not wild speculation about the ETF's backing or Barclays' imminent bankruptcy.
I'd like to conclude by mentioning one valid, though modest, complaint about SLV's custody of silver that few other critics have leveled: Why is there no published list that identifies the 140,000 or so bars of bullion that make up SLV's burgeoning holdings? I can think of many excuses, but these are far outweighed by the expectation of compliance with a de facto disclosure standard in the ETF industry (namely, that these funds be operated with complete transparency, part of which is achieved by publishing a bar list). Admittedly, a bar list would be a challenge for SLV given the large number of bars, but by no means a very difficult one. In the case of Barclays' gold ETF, IAU, the lack of a bar list is understandable since the COMEX itself publishes a daily record of the registered gold held at the warehouses in IAU's name. Therefore, a comparative minimum would be a daily report issued by JPMorgan Chase, SLV's Custodian, that shows the total ounces of silver held in allocated storage in SLV's name. The detailed bar list can come later, once Barclays management realizes the lack of one is a real issue in the minds of many investors. If you're one of these investors, I would suggest you let them know.
© 2007 Tom