Reddit Didn’t Conquer Silver, But It Did Spook An ETF

Reddit’s excitable gamblers and other retail investors suffering from delusions of grandeur (and I’m uniquely qualified to diagnose that, by the way), didn’t succeed in cornering the silver market, but they did manage to force a prospectus tweak in the iShares Silver Trust.

Whether this is “news” or not is largely in the eye of the beholder, but it’s unequivocally funny.

This was documented by Katherine Greifeld on Tuesday. When I saw it, I scribbled a note to myself to mention it. If nothing else, it’s good comic relief and depending on the circumstances, it could be material at some point. The following excerpt from the prospectus contains “updates,” Greifeld noted:

Market speculation in silver could result in increased requests for the issuance of Baskets. It is possible that Authorized Participants may be unable to acquire sufficient silver that is acceptable for delivery to the Trust for the issuance of new Baskets due to a limited then-available supply coupled with a surge in demand for the Shares. In such circumstances, the Trust may suspend or restrict the issuance of Baskets. Such occurrence may lead to further volatility in Share price and deviations, which may be significant, in the market price of the Shares relative to the NAV.

Is that something that’s worrisome? Well, maybe. It suggests the vehicle could conceivably cease to work “right” (to put it colloquially) should demand “decide” to take off again. Large premiums and/or discounts to NAV are an issue, in my view, although that’s probably not how the ETF industry would describe them.

The volatility of flows for the silver product was on full display recently. You might recall that SLV raked in a massive haul during the retail crowd’s initial offensive. That reversed in pretty dramatic fashion (red bar in the figure below).

I don’t know what you want to call that — if the initial inflows were an “offensive,” I suppose that’s a “retreat.”

Whatever the case, this kind of thing isn’t generally healthy, and the prospect of the product being forced to constrain “normal” functioning due to the whims of the crazed masses speaks to some of my longstanding concerns about ETFs more generally.

Please, I implore readers, don’t misconstrue my point. This isn’t an attempt to stoke fear about ETFs.

It’s just to say that there are limitations to what can be accomplished with financial engineering. We’ve all taken a turn singing the praises of ETFs at some point — or at least those of us who are honest about their unequivocal benefits, as long as we’re talking about products that aren’t facilitating undue speculation or exposing retail investors to risks they don’t understand.

The issue is just that all ETFs are, in some sense, derivatives. It’s all financial engineering. You can quibble with that characterization all you like, but it’s accurate. And it’s even more accurate depending on the ETF. In this case, a share of SLV is definitely not a piece of silver. Irrespective of what it potentially represents, a number on a screen is just pixels. And pixels aren’t hunks of white metal. What you’re buying in these products are abstractions.

Take that for whatever it’s worth.


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4 thoughts on “Reddit Didn’t Conquer Silver, But It Did Spook An ETF

  1. Maybe if the firms who conduct financial engineering on such a grand scale, and build paper houses, had been more mindful of their actions the last couple of decades, people wouldn’t be so cynical and jaded. They helped ensure the capture of our political system. Why would the public be sympathetic to any actions the trust custodian takes to prevent a rip in the edifice. Oh, that’s right, they custodian firm was acting in the interest of our pensions and and 401(k) savings. I forgot.

    There are paper houses out there. The iShares Silver Trust does seem to have been revealed as one of them. For those following this one for the last 15 years, there has been pretty much, ongoing conjecture by many who are on the outside but knowledgable.

    On this particular trust, if it’s so dangerous, they know, and they, in coordination with regulators, should take actions to mitigate the risks, including shutting it down. Adding a few paragraphs to the prospectus doesn’t really remove the danger of a rip in the fabric, does it.

    It doesn’t matter for this trust, though, right, because they list the numbers of their physical bars on a website. So, really no problem after all. They have the silver. I just checked. The bar list is a 10,067 page PDF. Solid. So, nothing really to see here and we should all just move along.

    1. I’m not into the conspiracy theories. That’s not the point. The point is that all of this is just financialization on top of financialization on top of financialization. Every layer that we add makes it more abstract. Abstractions of abstractions of abstractions, all built originally on myths — stories we’ve told ourselves.

      1. And as my daughter repeatedly points out to me, we all have our own private versions of those stories. Perhaps that is why this century has gotten increasingly out of hand and society more fragmented.

  2. Interesting.

    Now, do stock brokers hold all of your shares? Or do they lend some of them out to short sellers and arbitragers to earn some extra fees.

    Speaking from first hand experience, bullion dealers also lend out gold especially, to earn a bit of return. That includes central banks, by the way.

    When it comes to coins and smaller bars, our bank also lent out customers holding from the vault. Now & then we’d have to really scramble to find some pieces when I client asked to take physical delivery of the pieces.

    I cannot recall if we every lent our silver bars or bags of coins.

    So the only way to make certain that you actually own metal is to buy physical pieces. Some funds promise to not lend your holdings and say they will be sitting on a shelf with your name on it. Most do not make that promise.

    BTW- the large contract-size silver bars are not shiny things. They are a dirty gray in color, sitting stacked up on palettes if our vault was any indication.

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