ETF Momentum Tracker looks at iShares Silver Trust (SLV)

Will Bernake’s comments put SLV on the move?
Don Dion, Publisher of Fidelity Independent Adviser
Don Dion, Publisher of Fidelity Independent Adviser
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June 13, 2008 - PRLog -- Bernake’s latest dollar commentary has caused some investors to wonder wether inflation concerns will trump recent weakness in metals ETFs.

While GLD and SLV, the SPDR gold and iShares silver ETFs respectively, have experienced a boon in the last year, prices faltered since March as Fed inaction led some investors to reevaluate their hedge against inflation.

When SLV was first profiled by Don Dion’s ETF Momentum Tracker in April, it was up nearly 21%, while GLD topped $1,000 per ounce for the first time in history. Although gold and silver prices have certainly continued to move in tandem, the change in SLV’s recent discount may suggest that the fund’s use as an inflation hedge may not be fully realized. This increase, coupled with Bernake’s ongoing concerns, provides a good opportunity to reassess SLV’s potential.

The first quarter was one of the market’s worst in recent history, as losses swept across almost every type of stock and the S&P 500 posted a 9.5% decline. A handful of commodities bucked the trend, causing commodities-oriented ETFs to cluster at the top of the ETF Momentum Tracker Table. While weakening silver prices drove SLV to a 4% discount in March, the fund has recovered remarkably well, trading less than 1% below NAV as of market close Wednesday.

Before SLV was launched in April of 2006, there were a handful of ways investors could include exposure to silver in their portfolios. They could purchase the metal itself, buy futures contracts in the metal, hold stocks in companies with direct exposure to silver prices or invest in funds that focused on those companies. SLV offers a simpler and easier means for most investors to gain direct exposure to silver. When you buy a share of SLV, you are buying a stake in a cache of silver bullion stored at the London branch of JPMorgan Chase. The price of each share of SLV should reflect the current price of ten ounces of silver, minus the fund’s 0.5% operating expense. If silver prices go up, shares in SLV go up.

SLV’s method has proven extremely popular—so popular that the fund is considered to be partially responsible for the steep climb in silver prices since the fund’s inception. The fund has accumulated more than $3.3 billion in assets, allowing for the purchase of more than 5,776 tons of silver. In part, the ETF’s success reflects the fact that silver has taken on part of gold’s traditional role as a hedge against inflation and financial crisis. With gold trading near all-time highs in recent years, silver, which hasn’t come close to the record highs it reached during the late ’70s and early ’80s, also appears to have more potential for upward mobility. Silver sold for $49.45 an ounce at its highest in 1980 but traded at just $17 an ounce as of April 21.

While Bernake’s recent comments may renew interest in SLV’s hedging potential, SLV has also been praised as an aid for diversification. Unlike gold, silver has numerous industrial uses, making its pricing far more prone to fluctuate due to the stops and starts of the overall economy. Demand for silver has increased steadily in recent years as rapidly expanding emerging economies have used the metal in the manufacturing of refrigerators, batteries, semiconductors and other products. Furthermore, Morris points out that precious metals aren’t necessarily much better than stocks at outpacing inflation. “A better argument for investing in this ETF is for diversification purposes, since silver prices aren't correlated with stocks,” says Morris. “But to benefit from those properties, you need a long-term view and a stomach for some volatility.”

When the stock market is hurting, silver’s lack of correlation with the stock market makes its volatility a bit easier to bear. Make no mistake—SLV is certainly independent and volatile. While the MSCI EAFE index of foreign stocks lost 3.12% for the 12 months ending April 18 and the S&P 500 lost 3.70%, SLV shot up more than 27%. Similarly, SLV plummeted nearly 9% during the month ending April 18, while the EAFE gained almost 7%. SLV is too young to have produced any reliable risk measurement data, but silver prices are notoriously volatile, and there’s every reason to think this fund’s performance will be as equally prone to gyrations as the commodity, itself.

Many analysts are bullish on silver, with some predicting prices of $30 per ounce before the year’s end. If inflation continues to loom as a threat to economies around the world and industrial demand for silver remains high, the rally for this metal might just be getting started. But if the gloomy economic conditions of recent months fade and the U.S. dollar strengthens, it’s questionable whether precious metals can continue to thrive. If the bleak first quarter of 2008 turns out to be an isolated correction in the stock market, SLV’s rally could be just as short-lived.

Period*    Mkt. Return (%)   +/- Index**
1 week   0.58     -1.01
1 month   -8.77     -15.65
3 months   10.29     +6.18
YTD   20.30     +25.42
1 year   27.38     +30.50
*Through 4/17/08  
Source: Morningstar

Total Net Assets     $3.375 billion
Ounces of Silver   185.4 billion
NAV per SLV in Silver   99.023%
*As of 4/18/08

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Fidelity Independent Adviser is a family of newsletters, that provides to a broad range of investors Don Dion’s commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the United States and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters.
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