BLK BlackRock Inc

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.

Individual 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.

The fund 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 8.9% to $26.89 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. Other assets that have been touted by traders gathering in online forums also slumped: Shares of GameStop Corp. dropped roughly 50%, while AMC Entertainment Holdings fell almost 40%.

Shares of SLV -- which manages over $18 billion in assets, according to BlackRock -- dropped more than 7% Tuesday, erasing most of its gains 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.

Such a dynamic helped to power silver prices higher in recent days, said Joseph Stefans, head of trading at MKS (Switzerland) SA, a precious-metal trader. "It's a knock-on effect," he said.

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 rush to silver began after some participants on online forums said that aggressive buying could propel GameStop-like gains for the precious metal late last week. Many traders on Reddit forums have contended that they weren't behind Monday's rally, with some of them alleging that the idea is a ruse by hedge funds to diminish interest in GameStop.

Compared with stocks, silver is a much more difficult market for executing a "short squeeze," traders and analysts said. That is when investors drive prices higher, forcing people who had bet on prices dropping to cut their losses, fueling further gains.

"To short squeeze a commodity market, you would need to own a substantial portion of the actual underlying physical market," Jeffrey Currie, a commodities analyst at Goldman Sachs Group, wrote in a note Tuesday.

On top of this, there are rules that limit the size of positions individual investors are allowed to take on. These were put in place after "Silver Thursday" in 1980 when the Hunt brothers, sons of wealthy Texas wildcatter H.L. Hunt, allegedly cornered the market by buying up nearly one-third of the world's supply, driving the price up 713% over three weeks.

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.

Trading activity has also soared in London's over-the-counter market, where over a billion troy ounces of silver were traded on Monday, just shy of an all-time high in records dating back to 2018, according to the London Bullion Market Association.

Write to Joe Wallace at Joe.Wallace@wsj.com

(END) Dow Jones Newswires

February 02, 2021 13:08 ET (18:08 GMT)

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