PureFunds has a simple strategy: Be first in the market with innovative exchange-traded funds. Andrew Chanin, PureFunds’ co-founder and COO, describes the firm’s ISE Junior Silver ETF and the factors that make a “leveraged play to the actual spot price of the metal.” In this interview with The Gold Report, Chanin goes on to list some of the names included in the fund and explains how they contribute to its success.
The Gold Report: In August, the most active contract in the silver futures market had its best week in five years, and your PureFunds ISE Junior Silver Exchange-Traded Fund (SILJ) traded higher. What should silver investors expect through the end of 2013?
Andrew Chanin: In one word: volatility. However, I think the long-term trend for silver is an upward pattern. The fundamentals for silver and other precious metals look very bullish for stock prices in the coming months.
TGR: You started this silver junior exchange-traded fund (ETF) in late November 2012. Why then? Why silver?
AC: My partner Paul Zimnisky and I have wanted to launch a junior silver ETF for a long time. We see silver as an essential commodity for many purposes. It has incredible industrial uses as a conductor of heat and electricity. It has many medical and surgical applications, as well. On top of that, we’ve seen an undeniable increase in investment demand for silver.
“The fundamentals for silver and other precious metals look very bullish for stock prices in the coming months.”
I like to look at the demand for silver as a pie chart, in which many of the wedges of the pie—industrial investment, jewelry, monetary—are fighting to take up more of the total supply representing the whole pie chart. However, it’s very difficult to meet increasing demand when you don’t have increasing supply.
For example, production in Mexico in H1/13 looks to be down 10%, and Mexico is as essential to the silver production and supply equation as any region.
In addition, many producers were operating at a loss when their cost of getting an ounce of silver out of the ground was higher than the prevailing spot price of silver.
These issues paint a very ominous supply-side picture, while we continue to see record demand for U.S. silver eagle coins. In India, demand increased massively between April and July. This shift in the supply-demand curve makes it appear that demand may sharply outpace supply in the near term and beyond.
TGR: Do those two demand drivers—investment and industrial—make silver the trade right now?
AC: I believe strongly in silver. Precious metals tend to correlate with each other, so it’s important to look at the sector as a whole. Historically, silver has tended to be a beta play on gold. We are seeing that as gold prices move up, silver tends to move up more. It’s the same on the way down.
“We’ve seen an undeniable increase in investment demand for silver.”
In addition, the miners tend to be a beta trade on the underlying metal. Typically, the miners will move even more drastically than the metal price. Then, within the mining space, the junior names tend to have a higher beta play than the more senior producers.
Although the gold-silver ratio had been at near-term highs, I believe we are starting to see that spread collapse a little bit and silver will continue to gain serious ground.
TGR: Why did you choose to build an ETF around junior silver companies instead of large-cap silver miners or midtier producers?
AC: First off, ETFs are like that line in the movie “Talladega Nights”: “If you’re not first, you’re last.”
We did not want to be second to market with any of our fund ideas; every element in our suite of products is the first of its kind. When we looked at the precious metals mining space, we saw several gold equity plays. We wanted to create the first junior silver mining fund.
People who are fans of the junior mining space are there because they get that higher beta play. If investors believe silver prices are on the rise, we thought the best vehicle would be giving them access to a basket of junior silver stocks. But the movement, the volatility and the risk-reward profiles weren’t the only reasons that we were interested in the junior space.
People who invest in mining companies have a higher risk-reward profile than others. They, and the companies they invest in, run different types of risk. There is company risk where management might not perform or a crisis hits the company, reducing its market cap. There also is nationalization risk, where a country takes over a producing mine.
We wanted to provide a way for investors to get a basket of these companies to diversify or mitigate some of that risk. You can’t eliminate company risk, but you can try to protect against the amount of risk any one company contributes to the risk profile of your entire investment by diversifying. By trading a basket of junior mining companies, you don’t need to pick that one superstar company; instead, you have a group of companies that should track the industry as a whole.
TGR: Tell us about the index that your junior silver ETF tracks.