By Melissa Pistilli-Exclusive to Silver Investing News

Those in the financial community have dubbed September 29, as ‘Black Monday’. It certainly was a dark day on Wall Street as the stock market tanked to unheard of lows in reaction to the House’s 228-205 rejection of Paulson’s US$700 billion bailout plan.

The Dow Jones was the hardest hit, plunging close to 800 points in its hugest point drop in history.

Early Tuesday, President George Bush said he wanted to assure “our citizens and citizens around the world that this is not the end of the legislative process.” He warned that without the bailout, the economic damage will be “painful and lasting.”

The devastation on Wall Street made a huge impact on financial markets around the world. The TSX, like the Dow, experienced its biggest point drop ever falling nearly 850 points. Japan’s Nikkei 225 index dropped 4.1 per cent to its lowest level since June 2005. After a 5 per cent slide, Hong Kong’s market managed to close with a gain of .8 per cent with the help of bargain-hunting. Australia’s S&P/ASX-200 index took a 4.3 per cent dive.

Instability in the U.S. also led to volatility in the European markets. The U.K.’s FTSE 100 index lost 3 per cent in early trade; however, later in the day it was up 1.4 per cent. Germany’s DAX was down 0.1 per cent. The Eurozone business climate indicator for September fell back to -0.79 from -0.28 in August.

“This bodes ill for industrial demand growth from the Eurozone region,” said Manqoba Madinane, a commodity analyst at Standard Bank Group Ltd. “Furthermore, U.S. credit spreads have tightened. This could also limit inflows into precious metals today.”

Yesterday, silver prices rose as high as US$13.20 to close at US$13.09/oz. Tuesday, the precious metal sank as low as US$11.72 and closed the day at US$12.06/oz.

“The outlook for silver is still extremely mixed at the moment as the metal has seen a huge influx of investment demand in recent weeks, while slowing economic growth will reduce the metals industrial demand base,” said James Moore, an analyst at TheBullionDesk.com in London.

Silver investors move towards ETFs

It is becoming more and more obvious to serious silver investors and analysts that the growing disconnect between the paper and physical markets shows no signs of stopping. While demand for physical silver remains “white hot”, according to Resource Investor’s Gene Arensberg, “an unnatural shortage has developed … because the paper-futures-contract-dominated sport price was panic-driven way to low.”

Premiums, the price retailers of physical silver charge on top of the spot price, are steadily rising.  Those physical buyers not willing to spend the up to US$4.00/oz for some silver coins products are turning to silver ETFs. Evidence for this, said Arensberg, “is in the very large additions to the ETF metal holdings.”

As the price of silver dropped from US$19 levels to as low as US$10.28 since July, only to rally back to the US$13 levels, iShares Silver Trust (SLV), the largest silver ETF,  has added 901.39 tonnes of new silver to its holdings; proof positive for Arensberg that “there has been considerably more buying pressure than selling pressure.”

In September alone, the trust has added 427.37 tonnes of silver to its holdings. On September 25, SLV holding rose to a record 6,901.41 tonnes, growing almost 7 per cent since the beginning of the month when bargain hunters began using lower prices to build up their holdings. This month, the SLV has increased its silver holdings and the trading float more than in any other single month since its first two months of operation in 2006.

 ”Physically backed ETFs are very popular right now because there is a sense that they are more of a tangible asset and less exposed to counterparty risk,” said Stephen Briggs, commodity strategist at RBS Global Banking & Markets. Briggs believes the silver ETFs “tend to be more dominated by the retail investor” than gold and platinum ETFs in part “because silver isn’t as expensive, so it is slightly more accessible.”

This obviously is greatly connected to the decoupling of the physical and paper markets. ETFs allow investors to buy into the silver market at current spot prices rather than paying the high premiums bullion dealers are placing on physical silver products.

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