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…

More importantly, if Redditors, and whoever else has jumped onto the bandwagon at this point, continue bidding up SLV because of its discrepancy with physical prices, the situation will only get worse.

If there is one thing that can be known with certainty in advance, it is that someone out there is bound to completely misunderstand the situation and call for people to buy the ETF because it is “undervalued”.

APs might deem the price spread between ETF and physical silver to be impossible to close given market conditions, and simply allow the disconnect between both to continue.

If this happens, SLV’s management might decide to expand their remit to enter into futures/swaps/forwards positions in order to keep the price of the ETF in line with the physical market.

What happens then?

Expect a lot of volatility as the APs come back to reassert the relationship between SLV and its new basket of underlying assets. If SLV was bid up too high relative to the value of the new basket, sharp falls in the ETF’s price can be expected.

If SLV was not bid up enough, then the ETF’s price would be expected to rally sharply. 

At this point, it is important to note that if this sequence of events occurs, it would be a squeeze that was created by Reddit, except the ones they are squeezing would be themselves, similar to what happened with GME.

As explained previously, it is unlikely that the price of silver has been manipulated, which means that the hypothetical squeeze in physical only happened because Reddit piled into SLV.

If this hypothetical squeeze caused ETF prices to jump higher and bring in more Redditors, they would be buying from the first group of Redditors!

Who’s squeezing whom then?

Having a solid grasp of what happens in an individual market and then taking a punt and hoping for a bit of luck to fall your way is par for the course in trading/investing.

Everyone needs luck. 

But taking a punt when one does not understand the parameters of a market, much less any kind of grasp on what is happening within it, is relying completely on luck.

Sure, there are people out there who rely entirely on luck and walk away with mind-bogglingly large sums of money, but these are in the tiny minority.

We only hear of them because of the survivorship bias, and because we don’t hear of the countless many who blew up their trading accounts, our minds drastically reduce the probability we attach to such outcomes happening to us.

Obviously, this is very much to our detriment.

We just want to conclude this mini series by saying that, if you are thinking of jumping on the bandwagon that is the Reddit Silver Salvo, the question you should be asking yourself is not “How high can silver go?”, but, “How lucky do I feel?”