Is The Silver Market Really Being Manipulated? SLV Beware!
It seems that Reddit’s vehicle of choice for their Silver Salvo is SLV, a silver ETF. This makes sense for them, since most do not have accounts (or brokers) that allow them to trade silver futures, leaving them with ETFs as the only way to gain exposure to silver prices.
Moreover, ETFs are cheap to trade, and trade just like stocks. This means that Redditors do not have to learn about new concepts like initial margin, maintenance margin, or open interest before jumping into their positions.
Unfortunately, that’s where the advantages of trading silver via the SLV end, and the potential nightmare begins.
SLV is a trust that owns actual physical silver, which makes it attractive to a lot of investors who want easy exposure to silver’s price.
However, an ETF is, at the end of the day, a structured financial product. As with all structured products, their ability to faithfully track the prices of what they’re supposed to track is severely hampered in times of stress.
Having a horde of retail investors stampeding into an ETF definitely counts as a “time of stress”. But what actually happens?
Without getting into too much detail, ETFs work well in normal trading environments because a group of designated broker dealers called authorized participants (APs) can arbitrage away any price differences that arise between the ETF and its underlying asset(s).
For SLV, this means that units of ETF can be exchanged for physical silver, and vice versa. This results in SLV being able to track the price of silver reliably and consistently, in normal times.
In times like these, massive demand leads to APs buying the required amount of silver and swapping these for shares of SLV. This is normal business behavior over the course of a trading day.
However, what isn’t normal is the enormous strain the demand for silver places on the physical market; where actual silver bars are traded.
Precious metal ETFs like SLV already hold in their vaults a good chunk of physical metal supply, which means that a huge spike in demand like the one we are witnessing now has the potential to create a squeeze in the physical market.
If this happens, physical prices would surge higher, creating a situation where APs can no longer arbitrage away the price differential between SLV and physical silver – which is when the nightmare begins.
To be concluded…
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