(Kitco News) - The silver market has hit the five-year anniversary of what has proven to be a landmark event--the launch of the iShares Silver Trust (SLV) exchange-traded fund.

This was the first of a series of physically backed silver ETFs established around the world and they’ve made a major impact on the market. The total demand from them last year consumed the bulk of the world’s new silver supply not otherwise consumed for various kinds of fabrication demand, according to data from the consultancy CPM Group.

Analysts said the ETFs clearly have brought into the silver market investors who otherwise may not be there, thereby playing a role in silver hovering just below its record highs from three decades ago.

“I think they’ve had a transformational impact,” said Philip Klapwijk, executive chairman of the consultancy GFMS. “They have added demand to silver by making silver available to a wider group of investors and making it a lot easier to invest in silver. It’s taken metal out of the market in quite spectacular fashion. There’s little doubt that it has contributed to much higher prices than would otherwise be the case.”

OF course, not all of the huge run-up in silver prices over the last half decade is the result of the ETFs, Klapwijk said. Global macroeconomic conditions and geopolitical tensions were the fundamental catalysts, with silver rising along with gold as investors sought a safe haven. In addition, industrial demand for silver is increasing.

Still, “the ETFs have facilitated a greater level of investment demand for silver,” Klapwijk said.

The Web site for SLV shows that as of May 1, 2006, the amount of silver in the trust was a modest 653.17 metric tons. Flash forward to Thursday, and the Web site showed total holdings stood at 11,053.2 metric tons, or 355.4 million ounces, with total assets listed at $17.3 billion.

The concept for silver ETFs is similar to the one popularized in the gold market just a couple of years before the SLV. Investors buy shares in ETFs that trade like a stock but track the price of the commodity, with metal stored in vaults to back ETF shares.

Investors can take part in the market without having to assay, store and insure metal, although this means they also don’t have physical metal in their own hands as they would with say coins.

“It has allowed a relatively simple way for investors at different levels to invest in precious metals,” said Erica Rannestad, commodity analyst with CPM Group.

Through April 21, CPM Group put global silver holdings in 13 precious-metals ETFs around 605 million ounces.

“Without the advent of the ETFs…there would not be nearly the amount of interest in silver as an investment,” said David Morgan, independent precious-metals analyst with Silver-Investor.com. “So I would say the SLV was instrumental in getting a large amount of new silver investors into the silver market.”

Previously, he said, money managers in equity markets were precluded from investing directly in commodities. However, the ETFs cleared the way for these money managers to buy the commodity by trading a stock-like instrument, he explained.

“That opened up a huge market that had never existed before,” Morgan said. “So you had all of this pent-up demand of people who wanted to be in the silver market but were basically prohibited because all they could trade were equities. Now, they can trade an equity representing silver.”

The combination of the ETFs and similar holdings has left “the silver market as tight as I’ve ever seen it in my life,” said the longtime analyst.

The pace of new investment into the ETFs has moderated some, Rannestad said. But this is largely because the growth previously was so rapid in earlier years during an initial rush into the new form of investment.

For 2010, additions to global ETF holdings were 123 million ounces, Rannestad reported. In 2009, ETF holdings rose by 155 million ounces.

The ETF additions in 2010 represented 12.4% of total global supply of silver of 987 million ounce (including not only mine output but other sources such as recycling), Rannestad reported. Much silver is consumed by industrial uses. Excluding all fabrication demand, the amount of available silver was 142 million, meaning the ETF demand accounted for some six-sevenths of this.

So far, much of demand for ETFs has been fairly “sticky,” Klapwijk said. This means investors have not been quick to bail out on price pullbacks. It goes without saying, however, that just as ETF buying helped propel the metal higher during its bull run, an exodus from ETFs could accelerate losses whenever the silver market reverses course.

“I think for it not to be sticky and to see major drawdowns, you would need to have a significant change in move and sentiment toward silver and gold in general,” Klapwijk said.

By Allen Sykora of Kitco News; asykora@kitco.com

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