Silver ETF at Center of Reddit-Fueled Surge
February 02 2021 - 11:24AM
Dow Jones News
By Joe Wallace
A flood of money into one exchange-traded fund has helped drive
the surge in silver prices, underscoring the influence ETFs can
exert on commodity markets at times of rampant demand among
individual investors.
Retail investors on forums such as Reddit's WallStreetBets have
migrated toward silver in recent days, generating huge inflows for
BlackRock Inc.'s iShares Silver Trust, an ETF commonly known by its
ticker, SLV.
It took in a net $868 million Friday, its biggest one-day influx
since it was created in 2006. A further $511 million entered the
fund Monday, when silver futures prices posted their biggest
one-day advance in over a decade and hit an eight-year high.
Silver prices retreated Tuesday, falling more than 5% to $27.62
a troy ounce, after CME Group said it was imposing stricter margin
requirements on futures for the precious metal, which would make
them more expensive to trade on its Comex exchange.
The slide hit companies that mine silver, which had rallied in
recent days, with shares of First Majestic Silver Corp., Hecla
Mining Co. and Fresnillo PLC all lower.
Shares of SLV -- which manages over $18 billion in assets,
according to BlackRock -- dropped almost 7% Tuesday, but remain up
2.5% for the year.
SLV, which is backed by bars of silver in vaults in London and
New York, now sits on an enormous pile of the precious metal. ETFs
have absorbed the equivalent of 84% of the billion-plus troy ounces
of silver in vaults linked to the London Bullion Market
Association, according to Bank of America Global Research. SLV is
the largest of these funds.
Individual investors buying SLV have been the driving force
behind the silver-price rally, said Ross Norman, chief executive of
information service Metals Daily. "It's a very big number in a very
short space of time," he said.
SLV has traded in an orderly manner throughout the period of
heightened interest, a BlackRock spokesperson said.
ETFs are a popular way for mom-and-pop investors and day traders
to speculate on silver prices without touching the metal. All it
takes to invest in SLV is to buy shares in the fund on the New York
Stock Exchange.
When demand jumps for the ETF, it can set in motion purchases of
the underlying metal. It works like this: When appetite for SLV
rises, so does its share price. Broker-dealers authorized by the
ETF to create new shares in the fund then have an incentive to do
so. To create those shares, dealers must deliver bars of silver to
the fund, which first involves buying the metal if they don't own
enough already.
Although silver is in ample supply, traders said difficulties
could emerge in moving the metal to where it is needed in time to
meet rampant demand, including from SLV. Spot silver prices rose
above forward prices in London on Monday, a sign traders were
trying to attract new metal into the market and encourage buyers to
delay their purchases.
In another dislocation, futures in New York rose to a large
premium over prices in London, signaling potential problems
shipping enough silver to the U.S. to deliver against expiring
contracts. A similar disconnect between prices in the two trading
hubs emerged in gold in spring, caused by the grounding of
passenger planes that transport bullion around the world.
That prompted a scramble by traders to fly gold to New York to
cash in on higher prices there. It is harder to take advantage of
the arbitrage opportunity in silver because the metal typically
moves by container ship, a much lengthier process, one trader
said.
The interest in SLV echoes the frenetic buying of gold ETFs when
the yellow metal climbed to a series of all-time highs last summer.
At the time, some investors blamed the increasing popularity of
easy-to-access ETFs for contributing to heightened volatility.
Another illustration of the ability of ETFs to sway commodity
markets came last spring, when individual investors betting on a
rebound in oil prices piled into the United States Oil Fund. In
late April, when May contracts for benchmark U.S. crude oil turned
negative, USO controlled 30% of the June contract, Goldman Sachs
Group said at time.
To be sure, ETFs weren't the only factor behind the recent jump
in silver prices. Huge trading volumes in silver futures Monday
suggested professional investors were attempting to profit from
retail interest in the metal, traders said.
Write to Joe Wallace at Joe.Wallace@wsj.com
(END) Dow Jones Newswires
February 02, 2021 11:09 ET (16:09 GMT)
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