-- Posted 29 June, 2011 | | Discuss This Article - Comments:

The iShares Silver Trust (SLV) has seen a precipitous decline in the amount of silver it reports in its trust, even as the price of silver remains mostly flat in post-frenzy trading.  If SLV really does own the silver that it reports on its balance sheet, investors should be left to wonder if the SLV isn’t doing the bidding of the COMEX, which has reported falling supplies amidst larger requests from purchasers.

The iShares Silver Trust has experienced a massive amount of silver leaving its stockpiles.  Through June 23, the ETF giant reported that investors removed more than 1,300 tonnes of silver from its vaults in 2011 alone.  The biggest drop, of course, was at the height of the silver price in mid-summer, when silver rose to a peak at nearly $50 per ounce.  During that event, some 500 tonnes were removed from the product in a matter of days.

There exists a very large gap between the amount of physical silver and silver financial products demanded by investors.  While the ETF reports a decline in assets of 13% since January 1, and 17% since the April peak, we have to wonder where all the silver is flowing.

Physical Demand is Strong

Physical demand for silver products has never been better.  The Perth Mint reported that 2011 sales will reach a new record, having increased some 66% over the past year.  New mint capacity is now taken up by demand for its one-ounce coins, which have become the mark of a market dominated not by institutional, but by individual investors.

Short positions at the COMEX are at their lowest recording in some time.  The CTFC shows that total investment short interest from the 8 largest participants is equal to 40% of the gross silver available.  Gross long positions are equal to roughly 20% of the market, meaning that institutional short positions equal a net position of 20% short the market.

The long-standing short positions that were recently covered were done so with equal purchases of silver to displace the short silver holdings.  With the SLV now bleeding assets amid a boom in net silver purchases, it should leave us to wonder if the SLV is making up a greater portion of total COMEX deliveries than once thought. 

The rate of change in total open interest isn’t large enough to show a tangible decrease in total open interest.  Net spreads (positions where a short and long trade are entered, but balanced) make up the largest portion of the market since January, when the draining of the iShares fund first began.

Faulty Markets

The futures markets have never been as broken as they are today.  With claims to silver now circulating with real silver, the actual amount of silver available at any one time is virtually undiscoverable.  The exchange-traded fund and futures market should remain separate, allowing for investors to make sense of their individual ebbs and flows.  But with the markets operating under the CTFC’s business as usual guidelines, it looks like more of the silver market is made up of a smaller exchange-traded fund.

Dr. Jeffrey Lewis

www.silver-coin-investor.com