TED BUTLER COMMENTARY     

October 29, 2007

A Simple And Constructive Solution

In the waning days of the Cold War, the late President Ronald Reagan, in arms negotiations with the Soviets, often repeated the phrase, "Trust, but verify." Rather than insult someone by suggesting that you don’t believe him, it was a nice way of saying, we believe you, but we’d like to confirm what you say.

We practice this concept in everyday life. Parents are happy to hear their children come home from school proclaiming that they got a good report card, but they still want to see it. Investors believe their brokers when they are told of a trade execution, but still want the written confirmation. Employees are glad to hear of a raise or bonus, but still check their next pay stub. It’s normal to confirm the details, as it eliminates problems and misunderstandings later.

What prompts this opening dialogue is the large amount of e-mail I received as a result of my last article, "Money For Nothing," in which I wrote about Morgan Stanley (and other financial institutions) apparently claiming to store, and charging for, silver that did not exist. The vast majority of the contacts I received asked for my opinion of the silver ETF, SLV, run by Barclays Global Investors, which holds the largest known silver stockpile in the world. Readers wanted to know if I thought that real silver backed this security.

Up until I wrote this last article and studied the court documents in this case, my answer would have been that, because of the high quality of the names of the investment firms involved with the silver ETF, that I did not doubt the silver was there. I’d be lying if I said I still had no doubts. Please let me explain why.

First, the perceived quality of a firm’s name is no assurance, obviously, against questionable practices. Even though I wrote repeatedly of the existence of non-backed silver storage accounts, years ago, it still set me back a bit to see my analysis confirmed by a supposedly high-quality name like Morgan Stanley.

Second, it occurred to me that I was being somewhat hypocritical by giving the ETF a pass (because of the quality of the names involved), in my consistent message that investors demand the serial numbers and specific weights of all 1000 oz bars held in storage for them (as well as the ability to get delivery of those exact bars on demand). In my defense, I think I was so happy (and, admittedly, still surprised) to see an investment vehicle created that, for the very first time, could funnel institutional investment money into silver that I was reluctant to appear as a nitpicker and critic. But it always bothered me that Barclays silver ETF didn’t list the serial numbers.

Since there were many high-quality investment firms involved, as well as a listed exchange (the AMEX), and the principal securities regulator (the SEC), it seemed to me that I had little justification to doubt that the silver ETF wasn’t fully backed by real silver. But given the Morgan Stanley case, specifically, and the dismal failure of Wall Street and the banking and securities regulators, in general, to prevent the current mortgage and credit crisis we are engulfed in, doubting seems a lot more justified.

Let me be clear in what I am saying. I am not saying that I believe there is no real silver backing the Barclays ETF. I am saying I now have some doubts, given the Morgan Stanley case and how many investment firms and regulators contributed to the current credit crisis, where I had no doubts before.

Further, I have become more convinced, than ever before, that we will experience a severe physical silver shortage at some point, When that occurs, I have no doubt that many unbacked silver storage programs will implode and many investors will discover they were not storing real silver. Therefore, it is imperative to take the necessary measures to be safe, rather than to be sorry.

The hallmark of what I write about silver is to prod you to investigate and study the facts, and then apply your common sense. If you do that objectively, I’m sure you will convince yourself to invest in silver on a long-term basis. I’m convinced that silver is the best long-term investment around, but you shouldn’t just rely on me (or anyone else), you should rely on yourself. Likewise, there is no sure way I can tell you whether the Barclays silver ETF holds real silver or not.

Fortunately, I think there is a simple and construction solution to answering all your questions about whether real silver stands behind the Barclays silver ETF. That solution is for Barclays to publicly list the serial numbers and specific weights on the silver bars held for the trust.

Admittedly, there are a lot of bars held by the silver ETF, some 143,500 (143.5 million ounces). But, those serial numbers and weights already exist and are recorded and are in possession by the custodian, JP Morgan Chase (London). It would just be a one-time paper work exercise.

Besides, this simple and constructive solution is not radical or unprecedented. It is already employed by the big gold ETF, GLD, run by a Barclays’ competitor, State Street. Every week, State Street updates its gold bar list. Currently there are some 48,000 bars held in the GLD ETF (400 ounces each). http://www.streettracksgoldshares.com/us/value/bar_list.php

Since, the bar list for gold exists, I can think of no good reason for Barclays not to do the same for silver. But I don’t speak for Barclays.

Therefore, if you have questions about whether real silver exists in the Barclays ETF, you should ask Barclays Global Investors. I would certainly ask them to publish a list of the silver bars held for the trust and please feel free to quote or send this article. If they refuse to publish the bar list or delay or don’t respond at all, you must decide for yourself what that means. If you are an institutional investor, I would assume you have more clout than a retail investor, and that clout should be used to assure yourself that the silver really exists.

This is a win-win situation for existing and potential silver ETF investors and Barclays and the investment firms involved. I truly believe I am doing all parties a favor by offering the simple solution of listing the bars.

Contact information:

Barclays Global Investors

45 Fremont Street

San Francisco, CA 94105

Phone 415 597 2000

Fax 415 597 2696

E-mail client.reporting@barclaysglobal.com