It is only mid-May, but I am fairly certain the worst analytical
thread of 2013 will be the one trying to explain gold price
movements with ETF holdings. I noted at the
start of April
and two weeks before the yellow metal's face-plant into the
sidewalk, how peaks in investor interest followed, but did not
lead, the decline in gold that's been underway since September
2011. Longer long-term interest rates engineered through Operation
Twist is a
far more robust explicator
of gold prices.
Besides, gold prices have increased more than 7% since their April
16, 2013 low while ETF holdings have declined another 5.83%. Some
longer-term, strong-handed buyers such as central banks have been
willing to step up and acquire the metal being sold from
, but only at a lower price.
What About Silver?
Silver prices have fallen by more than 50% since their peak at the
end of April 2011. ETF holdings of silver, which include those of
iShares Silver Trust
(NYSEARCA:SLV) and the
ZKB Silver ETF
(OTCMKTS:ZKBSF), amongst others, have increased by more than 5%
during that period.
The relationship is not contemporaneous, though. ETF holdings lead
bullion prices by 28 weeks on average. Once this lead-time is
accounted for, we find the partial contribution of ETF holdings to
bullion prices since April 2011 has been -0.104, a negative
relationship. Restated, while investors in silver ETFs are stuffing
their pockets with the white metal, prices are going lower and they
do not seem to mind one bit. As investment demand for silver
accounted for 15.26% of total demand in 2012, the producers of
silver should be more grateful in public to these buyers than they
have shown. We all need customers like this.
As the late Marvin Gaye might have warbled, what's going on? While
the gold market has a buyer of last resort, the central banks,
which are willing to take mine output and re-bury it in their
vaults free from the burden of a profit-and-loss statement, silver
lacks such a buyer. The ETF investors in gold are a weak holder in
comparison to the central banks. ETF investors in silver are acting
as if they are a price-insensitive long-term, strong-handed buyer
and are willing to accumulate metal at lower prices.
The behavioral finance crowd should have a field day with this:
Investors who should be profit-maximizing and increasingly
risk-averse in the face of growing marked-to-market losses are
looking in the mirror, seeing a red "S" on their blue body suits,
and thinking they can act as scale-down buyers just like the
Someone should remind the silver buyers that most silver is
produced not as the result of dedicated silver mining but rather as
a credit to copper or lead and zinc mining. A copper miner that
produces 100 ounces of silver for 100 tons of copper focuses on the
copper price and simply takes whatever the prevailing price is for
Normally I recoil at the categorization, "smart money." However, I
think I just found its opposite.