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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