This essay was written by silver analyst Theodore Butler, an independent consultant.

Today I am going to write on a subject that I feel is of the utmost importance to all silver investors. It’s particularly important to those holding shares of the Barclays silver ETF, traded on the American Stock Exchange under the symbol SLV. Because this may prove to be quite controversial as well, I will attempt to be thorough in my discussion, in the hopes that my words will not be misinterpreted. Although I will try to keep it short and simple, there is much to discuss.

It is just over two years that SLV has been in existence. Trading commenced at the end of April 2006. I started writing about this Silver Trust three years ago when it was first proposed, and have written many articles since then. I have always maintained that the silver ETF was big doings for silver. In just two years the amount of silver held in SLV has grown to 195 million ounces, the largest known stockpile on the face of the earth. Throw in two new silver ETFs from London and Switzerland and total silver ETF holdings jump to more than 220 million ounces. That’s a lot of silver.

It’s no secret why the silver ETFs have proven to be so popular. For the first time in history, they enabled institutional and retirement funds and other stock-only type accounts to easily buy and hold silver. Given silver’s unique dual role, as industrial commodity and investment asset, this was no small development. It is also clear that the advent of the ETF had an important impact on the price of silver. Not as much as I had expected, but still significant. After all, the price of silver tripled after the SLV was proposed. While there were other factors, it was the introduction of SLV that exerted the most influence on the price. Prior to the SLV, silver was locked in a $4 to $5 trading range.

As a silver analyst, I have always recognized the importance of the SLV in the silver supply and demand equation. Key to that issue was the matter of whether real silver backed up the assets of the trust, as Barclays claimed. While some commentators doubted that all the silver claimed to be in the trust was really there, others suggested the silver was being leased out or was being used to suppress the price of silver. However, I always believed that the silver claimed to be on deposit was actually in the custodian’s vaults. I still do. What I will be discussing today doesn’t involve the silver claimed to be on deposit. So much time and attention has been placed on the silver already deposited (or not) in the SLV, that the most important issue has been overlooked. That involves silver not claimed to be on deposit.

(A brief side note here. I’m a (very) independent silver analyst. I write what I feel should be written about concerning silver, with little or no concern for what others may think. I’ve written more than 300 articles in the past seven years that have been underwritten by Investment Rarities, Inc., and made available at no charge to all who care to read them. Not once have I written that readers should buy silver from them, although I do hold them in the highest regard. Nor have I ever taken any potshots at the SLV, perhaps much to the chagrin of the president of IRI, Jim Cook, who rightly views the SLV as a competitor to what his firm sells. I want to thank Mr. Cook for never trying to interfere or influence my analysis on the SLV or any other issue I chose to write on.)

After Barclays decided to follow my public suggestion that they openly list all the weights, serial numbers and hallmarks of the bars on deposit, my conviction that the silver said to be on deposit was reaffirmed. I publicly congratulated Barclays for doing the right thing.

However, I did mention in past articles that I noticed delays, from time to time, in the depositing of silver into the trust for new shares that were purchased. I attributed this to the logistics of physically procuring and transporting the silver to the custodian’s vaults in London. This wasn’t the way the prospectus clearly dictated, namely, that the silver had to be deposited before any new shares were issued or, allowed to be purchased. However, I wanted to save my critiques for more important issues. You learn to pick your battles, and I chose not to harp about a short delay, of a week or two, of a few million ounces of silver being deposited into the trust.

I began to notice this pattern of delay in depositing silver into the trust about six to eight months ago. In fact, the pattern became so regular that I could tell, fairly precisely, when and how much silver would be deposited. I did this by observing the price and volume patterns in the trading of SLV shares. I shared this information with close associates, and could see they were surprised with the accuracy of the pattern.

One thing became clear - in obvious conflict with what the prospectus dictated, there were regular periods when the trust did not have all the silver it should have. In other words, SLV had the silver it said it had, but, at times, there should have been more silver than that. It was also clear to me the mechanism by which this delay could be effected. Buyers of new shares could be issued those shares without new additional silver being deposited through the short selling of shares to the buyers of the new shares.

Aside from a fascination with observing the pattern, my main take from the consistent delays in depositing silver into the SLV, was that silver was not readily available in London. As an analyst, this told me that the supply of wholesale quantities of silver was much tighter than was generally known. This coincided, of course, with a well-known tightness in retail forms of silver, especially US Silver Eagles.

Continued tomorrow-