Silver ETF Buying Opportunity: Despite The Sell-Off, We See Higher Prices Ahead (SLV, ZSL, AGQ, SIVR, PSLV, SIL, DBS, GLD, PAAS, SLW)
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May 5, 2011 10:04am
Peter Krauth: After watching silver’s (NYSE:SLV) wild and relentless climb since last August, some high-profile investors have started taking profits.
That’s caused silver prices to correct about 20%, down from $48.70 to $39.05 intraday yesterday (Wednesday).
Does that mean the silver bull market has peaked?
In a word: No.
Don’t misunderstand: We could still see additional declines in the price of silver.
After that, however, we can bank on the silver bull resuming for the very simple reason that we can identify the three specific factors that have caused silver prices to fall. And all three of those factors are as rational as they are finite.
Three Reasons the Silver Bull Stumbled
As Money Morning readers are well aware, I’m as much of a silver (NYSE:AGQ) bull as anyone. But when I look at the 20% decline silver prices have experienced in the past several days, I can attribute the drop to the following three reasons:
- Silver prices rose a long way in a very short time, making them vulnerable to downward pressure from other catalysts.
- The exchange on which silver trades made it tougher for traders by boosting margin requirements several times starting last week.
- And several high-profile investors have reportedly sold silver, exacerbating investor nervousness.
Let’s look at each of the three.
Silver Prices: A Long Run in a Short Time
I’m more aware of this than anyone. I put a “Strong Buy” on silver for Money Morning readers back in late August when the white metal was trading at $19.40 an ounce. It was at $48.70 on Friday, meaning that investors who took this advice pocketed a profit of as much as 150% in just eight months.
Even after the sell-off, those readers are sitting on a double.
In a follow-up article that appeared last week, I warned that a near-term correction was possible, but noted that the long-term outlook for silver was highly bullish.
Whenever a financial asset makes such a stunning advance in such a short time, it is much more vulnerable to a correction or consolidation. So this isn’t a surprise to me, and it isn’t a worry.
Comex Raises Silver Margins – Again
The Comex division of the New York Mercantile Exchange – where silver futures are traded (both of which are part of the CME Group Inc. (Nasdaq:CME)) – on Monday decided to raise the margin requirements on silver by 12% (the increase went into effect the next day). That came on the heels of two previous increases – of 9% and 10%, respectively – that were implemented last week.
Last week’s increases in the margin requirements for silver failed to quell the exuberant trading. But Tuesday’s 12% increase may have done it.
You see, the precious metal gold (NYSE:GLD) is purchased and held predominantly by big institutional investors, investment funds and even central banks. But silver is actually dominated by individual investors. And when the exchange increased the requirements for trading silver-futures contracts, a number of those individual investors were forced to liquidate their holdings.
Yet something, perhaps even more significant, also took place recently…
Smart Money Takes Profits, Reinvests
In recent days, a number of high-profile silver investors have sold the metal – further unsettling already worried individual investors holding silver.
The fact that the “well-heeled” were exiting silver “put fears in people’s minds,” Adam Klopfenstein, a senior market strategist with Lind-Waldock in Chicago, told MarketWatch.com.
The Wall Street Journal reported late Tuesday that such well-known investors as George Soros and John Burbank have been selling off their gold and silver holdings recently. Those sales have contributed to the recent price declines for these precious metals, and could threaten the nine-month rally gold and silver have experienced.
And Soros and Burbank weren’t alone in their decision to sell.
Eric Sprott, of Canada’s Sprott Asset Management LP – which has a total of $8.5 billion under management, and which is also one of the biggest silver bulls – cashed in $35 million of his own Sprott Physical Silver Trust ETF (NYSE:PSLV).
It’s likely this news hit the silver market, too, exacerbating the sell-off.
Why would Sprott do this? Remember, he’s a seasoned and astute investor.
In an interview with Toronto’s Globe and Mail newspaper, Sprott explained that he’s still very bullish on silver. He told the business daily that “Every dollar of money that was raised by selling shares of [the Trust] … was reinvested in silver or silver equities.”
What’s more, PSLV was trading at a 16% premium to its net asset value (NAV). So right near an interim top, Sprott recognized the relative value (versus his own silver ETF) in both physical silver and silver equities.
The trade by this savvy investor – cashing in the overvalued to reinvest in the undervalued – is a perfect example of how the smart money behaves, and why the contrarian investor often comes out on top.
Sprott also indicated that he’s not ditching his trust, and that he continues to own 25% of PSLV, allocated between his various investment funds and charity. [Editor’s Note: If you would like to emulate Sprott, take a look at the trade that article author Peter Krauth has detailed in the “Actions to Take” box that follows this story.]
The Silver Bull Lives
Even though such investors as Soros, Burbank, and Sprott have sold silver and silver-related holdings, a number of other experts continue to favor gold and silver. We mention gold because silver remains the “yellow metal’s” crazy cousin.
Hedge-fund legend John A. Paulson – who solidified his place in investing lore by shorting the subprime mortgage market – continues to believe in gold and silver.
And Paulson is far from being the only one. In a column published just yesterday, for example, Brett Arends, who writes for both MarketWatch and The Journal, made a highly compelling case that gold has yet to top out – and could actually “go vertical” from here. Arends made a compelling case, as did some of the institutional players he spoke to.
If gold were to skyrocket, silver would move as well.
Other investors have made similar prognostications.
So my advice is to watch silver closely for signs of a bottom before taking a position. And then buckle up and enjoy the (wild) ride.
[Actions to Take: If you’re looking to emulate Eric Sprott, of Canada’s Sprott Asset Management LP, consider the Global X Silver Miners Exchange-Traded Fund (NYSE:SIL). As Sprott himself recognized, silver shares, which normally offer good leverage on the metal’s price, have underperformed silver in its run up since late last summer.
This ETF is a great way to obtain instant diversification amongst a group of 25 silver miners, refiners, and explorers. Total expenses only run 0.65% and volume is a respectable 1 million shares of daily trading.
Related Tickers: iShares Silver Trust (NYSE:SLV), ProShares UltraShort Silver (NYSE:ZSL), ProShares Ultra Silver (NYSE:AGQ), ETFS Physical Silver Shares (NYSE:SIVR), PowerShares DB Silver (NYSE:DBS), SPDR Gold Trust (NYSE:GLD), Pan American Silver Corp. (Nasdaq:PAAS), Silver Wheaton Corp. (NSYE:SLW).
Before you make your move, closely watch silver for signs of a bottom. Then buckle up and wait for liftoff.]
Written By Peter Krauth From Money Morning
Peter Krauth is a highly regarded market analyst and expert in metals and mining stocks, with a special expertise in energy and resource-related investments. Using the contacts and connections amassed during years of covering commodities investments, Krauth scours the globe to research all commodity sectors, including precious metals, base metals, fossil fuels, alternative energies and agriculture. A one-time portfolio advisor having earned an MBA in finance from McGill University, Krauth is headquartered in resource-rich Canada, where he now focuses exclusively on his research.