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INTRODUCTION TO GLOBAL X SILVER MINERS ETF (NYSEArca: SIL)
Some of you may have seen the news regarding the launch of a new (and
at the moment the only) silver miners fund from Global X Funds, managed by a New York based company that issues a
number of ETFs, including one for copper miners. The copper and silver miner funds
started trading on April 20, 2010.
SIL has a 0.65% expense ratio and is based on an index from a German
based outfit at Structured-Solutions.eu. We
think the fund (and its underlying index) provides a reasonable
representation of the global silver miners sector. Fund's holdings can be viewed here.
The Global X Silver Miners fund came out of the gate with a whopping
$1.5 Million in assets under management.
In less than two months it has been in existence the fund has grown to
$54.6 Million in assets under management. As a comparison, the Global X Copper
Miners Fund (NYSE Arca: COPX) in the same period
has grown from $1.5 to $1.77 Million (Assets under management numbers are as
of June 15, 2010). Is there a
message there? We believe the message
is:
a) There is an appetite for silver (read as precious
metal) stocks in the marketplace;
b) The overall inflation is not being
"priced in" base metal stocks on this stretch.
If our thinking is correct, there is a separation in the minds of
investors of silver (and gold) stocks from other resource stocks. There may be other reasons for this
great disparity in market sentiment towards these two funds or, to be
precise, the asset classes they respectively represent. This is extremely important and should
serve as confirmation that the long anticipated currency crisis is here. Indeed, there is plenty of
coverage in the financial media of currency gyrations in various parts of the
world, however, this subtle sign reveals where the money is flowing. Speaking of money flow, several months
ago we published an article discussing potential avenues where money could be
directed in the near future and the 3600% growth in assets under management
of the silver miners fund in just five weeks confirms that we saw this
coming.
Getting back to SIL, it is an open ended fund where new shares are
created in 50,000 share increments.
That means the fund will grow as new money comes in (also discussed in
the above mentioned article) as well as the appreciation of fund's
holdings. We're not giving much
ink to individual stocks in the fund here as they are often and amply
dissected elsewhere on these pages.
However, we have to point out that Industrias
Penoles probably does not belong in this fund as
its primary silver assets are already represented in Fresnillo
which was spun out of Penoles a couple of years
ago. We would like to see Penoles removed from this fund and its allocation
distributed among the junior producers.
Overall, we think Global X Silver Miners fund is a timely addition to
the sector and will be popular with investors large and small. As it grows in size we would expect it
to get increasingly popular with institutions that have no knowledge of the
mining sector. This is a very
welcome development for the silver sector and particularly silver
companies. When the silver
bullion ETF (SLV) was first launched it had around 30 million ounces of
silver in holdings. It has since
added another 100 million oz to its holdings. This was because it provided a
convenient investment vehicle available for numerous investor groups which
had previously shied away from the sector due to its specifics. They needed an instrument that was
easy to trade without needing to know much about it. We think silver equity funds starting
with SIL can have a similar impact on silver mining stocks, where investors
who don't know or don't want to know much about individual silver companies
will buy the fund. Among other
factors are diversification throughout the sector, liquidity and access. Some of the individual stocks may be
difficult to get in and out of.
The majority of mining companies are not US based, though some have a
US listing. A mining fund should
have access to all public markets and companies worldwide. Now that the first silver miners fund
validated the demand we would expect new ones to come to market from
different competing groups (much like the bullion ETFs).
THIS GOLD THING IS GETTING TOO EXPENSIVE
Gold has been the star performer compared to silver in last couple of
years. Or so you would think
based on the headlines and the amount of attention either gets. That is because gold is the big dog in
the race - it is a bigger receptacle and logical place to go for the
"big" money. However,
the main reason we zeroed in on silver back around year 2000 was our
conclusion that in the coming hard assets bull market silver would outperform
gold comparative terms 3-to-1.
The other metric we have cited in the same context is that
gold-to-silver ratio would get below 20:1 before the end of this bull market
and possibly below 10:1. For
reference, as of this writing the ratio is around 70:1. This will be made possible by, among
other things, the fact that at some point the majority of (small) investors
will be priced out of the gold market. Pardon the lengthy prelude, but
it appears we're witnessing the early signs of that. On June 11, 2010 the iShares COMEX Gold Trust bullion ETF (NYSEArca: IAU) announced a 10-for-1 share split. That
brought its share price from $1000+ area to $100+ which they obviously
thought would make it more affordable for would-be-buyers and broaden the
reach of the ETF to wider audience.
We view this as the first of many to come and a confirmation of gold
price becoming "too expensive" for many investors. Enter silver.
THE FEAR FACTOR
As is well known in the investment arena gold and silver are the only
assets whose markets are driven by fear as opposed to greed which rules all
other assets classes. The fact
that SIL is embraced by the market to the extent it has been to date proves
that there is plenty of "fearful" money out there. We think such truly explosive growth
(in percentage terms) in assets under management is an important clue. To that end, the latest breakout in
both gold and silver to the upside should leave no doubt in your mind that
the "fear trade is in".
If there were a bell to ring on this occasion – this is it,
consider yourselves warned. Of
course, no one rings the bell at market turning points, so we hereby are
doing the next best thing. Time will tell if this was a good call.
On occasion seasoned investors talk about a 50% correction known to
temporarily break up the party in a commodity bull cycle. For example, in the last gold bull
market it happened when gold went from $200 down to $100 only to zoom to $850
afterwards. (We're not going to
use silver in this context because Ag can correct 50% on a whim and does so
fairly regularly.) We suspect
that such a correction may be in the cards at some point during this cycle as
well. In the current environment
ripe with all manner of moving parts, vulnerable to recurring liquidity crunch(es), credit crises and
ominous looking geopolitical developments virtually impossible to keep
straight in one's mind, let alone analyze their combined and cumulative
impact and/or consequences on the price of anything in the short term we
would suggest that you keep a look out for one of these 50% corrections. So don't fear the "fear
trade" as it were, it should be making you rich-er
as we speak. But don't get
complacent either. Anything can
happen at any time these days.
Sean Rakhimov
Editor,
www.silverstrategies.com/
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