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Silver ETFs Can Be a Nice Hedge

By Carl Delfeld of the Chartwell ETF Advisor

Some limited portfolio exposure to silver exchange-traded funds can help reduce volatility and perhaps increase total returns over time. But keep in mind that day to day prices fluctuate sharply.

Don Dion in Seeking Alpha explains that SLV is the older of the only two U.S. ETFs that provide direct exposure to silver— that is, offering ownership of the metal rather than of stocks in mining companies or other firms that might benefit from strong silver prices. By investing in SLV, shareholders take a direct stake in 145 million ounces of silver bullion stored at a London branch of SLV’s custodian, JPMorgan Chase. I may just take a peek at the bullion next week while I am in London just to make sure that it is all there.

Silver was worth $15.82 an ounce as recently as November 7— a nice increase from last summer, when prices averaged less than $13. Prices did pull back to $14.22 early this week as risk-averse investors seemed to avoid investments that tend to be volatile. But this is exactly the opposite of what they should be doing since silver ETFs are a great diversifier for a global portfolio and may also enhance returns.

Silver is definitely not for investors looking for high returns or stability. Rather, investors seek out silver because, like other precious metals, it generates returns that are almost completely independent from the broad stock market. In fact, Dion points out that some economic events that hurt stock prices may boost silver prices — for example, quickly rising inflation may lead to a stock market sell-off even as investors scramble to buy up hard assets.

Learn if and where silver belongs in your portfolio by joining the Chartwell ETF Advisor

Is Silver ETF Loosing Lustre?

The silver exchange-traded fund (SLV) will over time reflect demand for the metal and 2006 showed some weakness. According to the Silver Institute, total demand for silver dipped 1 percent last year to 911.8 million ounces from 925.6 million ounces a year earlier and silver jewelry demand falling 5 percent to 165.8 million ounces. Silver demand slipped in 2006 due primarily to the 58 percent increase in the metal's average price.

But while demand for silver consumer stuff declined and silver usage in photography slid 10 percent to 145.8 million ounces, the use of the metal in industrial applications, particularly electronics, climbed. Industrial demand rose 6 percent last year to 430 million ounces.

On the investment side, an AP report noted that demand surged ahead of the launch of the first silver exchange-traded fund, Barclays' Global Investors iShares Silver Trust Exchange Traded Fund, in April. But after the subsequent steep run-up in silver prices, some investors took profits and the market retreated. Investor demand totaled 64.5 million ounces in 2006, down 17 percent 77.2 million ounces a year earlier but still well ahead of the 46.6 million ounces counted in 2004.

The launch of the iShares Silver Trust ETF last April gives retail investors easy access to the silver market helped send average prices rocketing 58 per cent to a 26-year high. The ETF, launched with just 1.5m ounces of silver in trust, held 120m ounces at the end of last year and now holds more than 135m ounces. Global silver supply amounted to 912m ounces last year, according to the 2007 world silver survey released by GFMS on Wednesday.

Year-to-date (SLV) is up 3.7% after gaining 0.47% yesterday.

By Carl Delfeld of the Chartwell ETF Advisor

Platinum ETF Squeezing Market

The new platinum exchange-traded fund (PHPT) introduced by ETF Securities on the London Stock Exchange last week is squeezing an already tight market.

This ETF in tandem with Zurich Cantonal Bank of Switzerland announcement of its Platinum ETF could lead to a big impact on platinum prices as new investors arrive on the scene and drive up demand.

Chris Flood of the FT discusses this and looks at the demand profile for both platinum and its cheaper substitute – palladium – is changing due to the metals’ growing importance in the car industry. The demand for platinum used for autocatalysts, which reduce car emissions, rose 6.5 per cent last year to a record 4.2m ounces while demand for palladium in autocatalysts registered its first increase for six years in 2006, rising 8 per cent to 4.5m ounces. AngloPlat, the world’s largest producer, has already voiced concern about the potential impact of platinum ETFs, particularly the effect on jewellery sales.

By Carl Delfeld of the Chartwell ETF Advisor