Silver Lining: Chapter 2
Posted 01-06-2009 at 01:06 PM by HardAssetsInvestor.com
Written by Brad Zigler
Tuesday, 06 January 2009 11:09
Real-time Inflation Indicator (per annum): 9.9%
Silver traders continued to take profits in the overnight market early Tuesday in anticipation of the London fix. When City dealers settled at $10.85, the move seemed prescient.
Silver's technicals have softened a bit in the wake of last week's rally, but the cash market is still trading above near-term support at $10.43. Beneath that, buyers are dug in at $9.99-$10.00.
Of course, a little market backpedaling is a good thing if you're looking to buy the metal. We examined a case for silver in Monday's column ("Finally A Silver Lining?") and pointed out a way for investors to obtain physical metal through the wholesale market.
For liquidity-minded investors and traders, there are other options that can be exploited through a securities account. Four U.S. exchange-traded vehicles now offer long exposure to silver:
Looking at raw numbers, these products produced disparate results over the past month:
Some of that variance is due to price reporting. Lacking real-time access price reports, many investors base their returns and volatility readings upon last sale price, not the contemporaneous bid/ask market. For illustrative purposes, that's what we've done here.
For the liquid securities, there's really little difference between last sale and current market most times. The average daily trading volume for iShares' SLV, for example, is better than 5 million shares, making it one of the nation's busiest stocks. There's usually a very small time interval between SLV trades. For the USV notes, however, there can be weeklong gaps between trades. For this reason, it's always best to look at the real-time bid/ask spread to gauge the current return available.
Liquidity can be determined by either looking at the current spread (the smaller the percentage, the less variance between bid and ask) or by metering the security's liquidity index. The liquidity index represents the size of a trade necessary – all other factors held static – to move the market one percentage point. As liquidity measures go, the tighter (smaller) the spread and the higher (larger) the index, the better.
Tuesday, 06 January 2009 11:09
Real-time Inflation Indicator (per annum): 9.9%
Silver traders continued to take profits in the overnight market early Tuesday in anticipation of the London fix. When City dealers settled at $10.85, the move seemed prescient.
Silver's technicals have softened a bit in the wake of last week's rally, but the cash market is still trading above near-term support at $10.43. Beneath that, buyers are dug in at $9.99-$10.00.
Of course, a little market backpedaling is a good thing if you're looking to buy the metal. We examined a case for silver in Monday's column ("Finally A Silver Lining?") and pointed out a way for investors to obtain physical metal through the wholesale market.
For liquidity-minded investors and traders, there are other options that can be exploited through a securities account. Four U.S. exchange-traded vehicles now offer long exposure to silver:
- iShares Silver Trust (NYSE Arca: SLV) - The granddaddy of silver products, SLV is a grantor trust that holds bullion. Buy shares of the trust and you own an unallocated chunk of vault holdings.
- PowerShares DB Silver Fund (NYSE Arca: DBS) - This fund tracks a subset of the Deutsche Bank Liquid Commodity Index through a portfolio of COMEX silver futures.
- E-TRACS UBS CMCI Silver ETN (NYSE Arca: USV) - Investors in this exchange-traded note (ETN), based upon a contango-battling index, trade off tracking error for credit risk associated with issuer Union Bank of Switzerland.
- ProShares UltraSilver Fund (NYSE Arca: AGQ) - The newest entry into the silver market, this exchange-traded fund (ETF) is designed to produce twice the daily return reflected in the daily London silver fix. The fund was launched in December 2008.
Looking at raw numbers, these products produced disparate results over the past month:
Some of that variance is due to price reporting. Lacking real-time access price reports, many investors base their returns and volatility readings upon last sale price, not the contemporaneous bid/ask market. For illustrative purposes, that's what we've done here.
For the liquid securities, there's really little difference between last sale and current market most times. The average daily trading volume for iShares' SLV, for example, is better than 5 million shares, making it one of the nation's busiest stocks. There's usually a very small time interval between SLV trades. For the USV notes, however, there can be weeklong gaps between trades. For this reason, it's always best to look at the real-time bid/ask spread to gauge the current return available.
Liquidity can be determined by either looking at the current spread (the smaller the percentage, the less variance between bid and ask) or by metering the security's liquidity index. The liquidity index represents the size of a trade necessary – all other factors held static – to move the market one percentage point. As liquidity measures go, the tighter (smaller) the spread and the higher (larger) the index, the better.
Brad Zigler began his career as a trader for ContiCommodity, the trading arm of a the world's largest privately held grain dealer. Prior to his current role as managing editor of Hard Assets Investor, Brad was head of marketing, research and education at Barclays Global Investors' iShares exchange-traded funds complex and at Pacific Exchange's (now NYSEArca)options market. Representing the Options Industry Council, Brad has twice addressed Congressional and Senate panels on risk management and derivatives. In addition to editing for the Corporate Communications Broadcast Network, the Journal of Indexes, and CRB Trader, Brad has written for Mutual Funds, Financial Planning, Financial Advisor, Futures, Registered Rep. and Ticker magazines as well as The Street.com and MarketWatch.com. Brad's also been a financial correspondent for European Press Network, North Bay Business Journal and a PBS/NPR affiliate.
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