Coeur d'Alene Mines Corp. (CDE)

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New and accessible silver investment trust goes live in the US
Gold and silver ETF investment has slowed recently as the markets have become more cautious; does the market have room for another instrument and are either silver or gold top-heavy?

The latest silver investment vehicle, the ETFS Silver Trust, starts trading on NYSE Euronext on Friday 24th July with trading symbol SIVR. The instrument is an investment trust, sponsored by ETFS Services LLC, a wholly-owned subsidiary of ETF Securities Ltd., which has a proven track record in a wide-ranging portfolio of commodity-based Exchange-Traded instruments. This offers another opportunity for investors to gain exposure to the silver market without having to have a "commodities" account with a bank or broker.

This silver instrument is the newest precious metals investment trust. It has a successful act to follow in the iShares silver fund and its successors the silver fund run by Zurich Cantonal Bank in Switzerland and the ETF Securities fund that is listed in London. The holdings in these three funds, the first of which was launched in late April 2006, currently amount to a total of 10,911 tonnes, equivalent to almost five months' global industrial silver demand and in late July they are valued at approximately $4.6 billion on the basis of silver prices in the region of $13.50/ounce. The iShares fund in New York currently accounts for 80% of the holdings in these three large-scale funds.

Fabrication demand in jewellery and silverware fell by just over 3% or 208 tonnes last year, from 6,914 tonnes to 6,706 tonnes. Investment in silver ETFs, meanwhile, rose by 1,115 tonnes and amounted to 2,894 tonnes. Investment in gold ETFs amounted to 306 tonnes last year, against gold jewellery demand of 2,159 tonnes.

Silver ETFs therefore absorbed the equivalent of an additional 43% of 2008 demand for silver in silverware and jewellery last year while gold ETFs took up the equivalent of 14% of gold content in jewellery demand. Silver ETFs currently hold the equivalent of 1.6 years' jewellery demand, while the gold ETFs, at just less than 1,620 tonnes, hold the equivalent of between 70% and 80% of one year's jewellery offtake, at a value of $49 billion with gold at just below $940.

Obviously jewellery and investment are not truly comparable as there are caratage, fabrication and taxation considerations to be taken into account, especially in the case of silver, and these ETFs represent a silver investment outlet that is not readily available in other forms, especially to investors that are prevented by their charters from investing directly in commodities. More to the point, private individuals can use these instruments as a method of gaining exposure to silver in small quantities and without having to take physical delivery of the metal, as these instruments effectively trade as equities, tracking the price of the underlying commodity with a very small haemorrhage for management fees.

This might suggest, therefore, that silver ETFs are top heavy by comparison with gold, when compared with the jewellery demand in their respective markets. This is not necessarily the case, however.

Roughly 70% of gold jewellery demand is concentrated in countries where offtake is price-elastic on the basis of high-caratage, low mark-up and it is therefore arguable that something of the order of 30% of jewellery demand is bought for adornment alone (forgetting the emotional cachet that gold jewellery carries regardless of content; here we are talking purely about purity, mark-up and scrap value). On this basis, then, taking a conservative view and making the simple assumption that just 30% of gold jewellery is purely for adornment and the rest of it has an intrinsic investment philosophy behind it, holdings in gold ETFs at just over 1,600 tonnes are equivalent to almost 2.5 times annual gold "jewellery" demand as opposed to gold "investment jewellery" demand.

These are highly arbitrary numbers, but the point of the exercise is to suggest that, while at first pass it might look as if there is a massive silver overhang in terms of investment when compared with overall jewellery offtake a comparison with "price inelastic" gold jewellery demand suggests that the silver funds are not top-heavy and have the scope to absorb more metal yet.

There is a risk, though and it must not be ignored.

Silver market fundamentals are not good.

The slowdown in global industrial production rates has obviously had an impact on silver demand, exacerbated in particular by the onslaught of digital technology, which has continued to eat into photographic offtake, for so many years the primary prop of silver's industrial demand. In the 1980s the photographic sector (including X-rays and professional demand, not just amateur film) accounted for more than 40% of silver demand; now it is down to less than 15% of total.

The slowdown in overall demand has not been that dramatic, however as the fall in photographic offtake has largely been offset by a proliferation in industrial uses of silver, which have grown from 11,640 tonnes in 2000 to 13,910 tonnes in 2008, an annual average growth rate of almost 2.3% per annum. These elements of demand, which include electrical and electronic uses, brazes and solders, did fall last year, but by less than 1.5%, with a fall in fourth quarter demand counteracting the effect of strong growth in the first half of the year. Total fabrication demand for silver fell to just less than 26,000 tonnes in 2008, compared with a recent peak of just over 27,700 tonnes of demand In 2000 (figures from GFMS Ltd).

All the indications are that this year's market will generate a substantial surplus. So far this year, investment in ETFs and by implication the Over the Counter market has been strong enough to absorb this metal, and probably more. The question for debate is whether this momentum can be maintained.

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