Silver Looking Tarnished?

On Thursday, silver climbed above $48/ ounce, the highest level

since January of 1980. Silver is now up 42% year-to-date after

gaining over 80% in 2010. Since its 2008 lows, silver has gained

roughly 400%. Despite a drop in recent days, silver looks very

expensive from an historical standpoint.

As we started the year recommending silver –

a trade we

suggested exiting in early March –

we thought it would be useful

to revisit the outlook. Our view is that given the fact that there

does not appear to be any significant changes to the

supply/demand balance and that the metal’s valuations look the

most extended since the early 1980’s, we’re still very comfortable

stepping aside from this trade.

One of the reasons we first recommended silver back in

December was silver’s economic applications. Roughly half the

demand for silver, unlike gold, is tied to industrial uses. As we felt

that economic growth would be decent in 2011, but core inflation

would remain low, silver appeared to a better trade than gold,

which is useful principally as an inflation or dollar hedge.

What is interesting is that silver has posted stellar gains despite

fairly mediocre growth. In most of the developed world, growth

has generally slowed over the past quarter, in part due to rising oil

prices. Economic activity cannot come close to explaining the

spike in silver. This is particularly true when you consider that

other economically sensitive industrial metals are flat to slightly

down for the year.

Free Writing Prospectus

Filed Pursuant to Rule 433

Registration No. 333-173755

May 5, 2011

Investment Strategy Group Update

4 May 2011

If fundamentals are not driving silver, what is? Obviously

investors are looking at the metal for more than its practical uses.

This opens the question,“is silver in a bubble?”

To a large extent,

talking about commodity bubbles is a bit meaningless. Unlike

stocks, bonds, or real-estate, commodities produce no cash-flow,

so there is nothing to compare to price. In effect, commodities

are worth whatever someone is willing to pay.

That said, by the few objective measures you can use, silver

appears very expensive.  For example, one useful exercise is to

compare the change in the price of a commodity against the

change in the supply of money. Over the long-term, changes in

price should bear some relationship to the amount of money in

the economy, which is, in fact, the case. However, commodity

prices can and do diverge from monetary conditions for

considerable periods of time. From the mid 1980’s to as recently

as late last year, silver prices had appreciated far less than the

supply of money would have suggested. That situation has

dramatically corrected itself over the past six months.

Based on the ratio of the change in silver prices to the change in

the money supply, silver has gone from close to ‘fair value’

in

January to around 75% over-valued today. While silver reached

much more stratospheric heights in the early 1980’s –

in January

of 1980 it appeared 750% over-valued based on changes in the

money supply –

the current reading is the most expensive in 30

years.

by Russ Koesterich, Managing Director

iShares Global Chief Investment Strategist

Silver vs. US Money Supply 1959 to Present

0%

100%

200%

300%

400%

500%

600%

700%

800%

Feb-59

Feb-65

Feb-71

Feb-77

Feb-83

Feb-89

Feb-95

Feb-01

Feb-07

Source: Bloomberg 4/28/2011

Investment Strategy Group Update

To say that silver has momentum would obviously be a gross

understatement. With the metal catching everyone’s attention, it

is of little use forecasting a top. The fact that silver appears

expensive provides no hard ceiling to how high the price can go.

Over-the-counter stocks were clearly expensive in the summer of

1999, but that did not stop them from doubling over the next 6

months. What we can say is that there are no obvious

fundamental catalysts to justify the recent spike and the metal

appears very expensive based on several metrics. Given this

dynamic, we’re still comfortable with our decision to step aside.

For investors looking for precious metal exposure, we would

prefer gold.

___________________________________________________

Russ Koesterich, CFA, is the iShares Global Chief Investment

Strategist as well as the Global Head of Investment Strategy for

BlackRock Scientific Active Equities. Russ initially joined the firm

(originally Barclays Global Investors) in 2005 as a Senior

Portfolio Manager in the US Market Neutral Group. Prior to

joining BGI, Russ managed several research groups focused on

quantitative and top down strategy.

Another way to look at the relative value of silver is to compare it

to something else, gold being a logical choice.  Over the past

forty years, silver has averaged roughly 1/55th the price of gold.

While there have been significant variations –

it has traded as

high as 1/15th the price of gold and as low as 1/90th –

the ratio

has been relatively stable over the past thirty years. Today, silver

trades at approximately 1/30th the price of gold, the most

expensive relative to the yellow metal since 1980.

Source: Bloomberg, 3/31/11

Ratio of Spot Gold to Silver

1971 to Present

0

20

40

60

80

100

120

Jan-71

Jan-76

Jan-81

Jan-86

Jan-91

Jan-96

Jan-01

Jan-06

Jan-11

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offering to which this communication relates. Before you invest,

you should read the prospectus and other documents the

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Investing involves risk, including possible loss of principal. The iShares Silver Trust is not an investment company registered

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purposes of the Commodity Exchange Act.  Shares of the

Silver Trust are not subject to the same regulatory requirements

as mutual funds. Because shares of the iShares Silver Trust

are expected to reflect the price of the silver held by the Silver Trust, the market price of the shares will be as unpredictable as

the price of silver has historically been.  Additionally, shares

of the Silver Trust are bought and sold at market price (not NAV).

Brokerage commissions will reduce returns.

Shares of the Silver Trust are created to reflect, at any given time, the market price of silver owned by the trust at that time

less the

trust’s expenses and liabilities. The price received upon the sale of shares of the Silver Trust, which trade at market price, may be more

or less than the value of the silver represented by them. If an investor sells the shares at a time when no active market for them exists,

such lack of an active market will most likely adversely affect the price received for the shares. For a more complete discussion of

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Following an investment in the iShares Silver Trust, several factors may have the effect of causing a decline in the prices of silver and a

corresponding decline in the price of the shares. Among them: (i) A change in economic conditions, such as a recession, can adversely

affect the price of silver. Silver is used in a wide range of industrial applications, and an economic downturn could have a negative

impact on its demand and, consequently, its price and the price of the shares. (ii) A significant change in the attitude of speculators and

investors towards silver. Should the speculative community take a negative view towards silver, a decline in world silver prices

could

occur, negatively impacting the price of the shares. (iii) A significant increase in silver price hedging activity by silver producers.

Traditionally, silver producers have not hedged to the same extent as other producers of precious metals (gold, for example) do.

Should

there be an increase in the level of hedge activity of silver producing companies, it could cause a decline in world silver prices,

adversely affecting the price of the shares.

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commissions. Because the expenses involved in an investment in physical silver will be dispersed among all holders of shares of the

Silver Trust, an investment in the Silver Trust may represent a cost-efficient alternative to investments in silver for investors not

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