How Reddit Traders Are Using an ETF to Bet on Silver

(Bloomberg) -- The latest market frenzy fueled by retail investors is focused on silver, but many of the bulls aren’t actually buying the precious metal. Instead, they are pouring hundreds of millions of dollars into an exchange-traded fund known by its ticker, SLV. BlackRock Inc.’s iShares Silver Trust, the largest exchange-traded product tracking the metal, has experienced unprecedented inflows as traders attempt to force a shortage of physical metal that would push silver prices yet higher. As with GameStop Inc. and AMC Entertainment Holdings, the coordinated efforts of these buyers are leading to huge market moves, not to mention a challenge for those tasked with shifting metal bars around during a lockdown.

1. Why are investors buying silver?

They’re reacting to posts on Reddit’s WallStreetBets forum encouraging traders to pile into silver. Although hard to determine the exact origin, comments began appearing on the Reddit page on Jan. 27 saying that banks have been keeping prices artificially low and urging users to buy into SLV. The surge of demand sent the precious metal’s price to an eight-year high and led to SLV’s best day of inflows on record.

2. What do they get when they buy into the ETF?

The $18.4 billion fund is organized as a trust, a structure that is regulated and taxed differently than more vanilla ETFs but which is able to invest in commodities. Its objective is to reflect the price of silver owned by the trust, minus the trust’s expenses and liabilities. When investors buy shares of the ETF, the trust buys silver from the physical market, mostly in the form of individual bars.

3. Where does all that silver go?

The bars are held by custodians with vaults in London, New York or elsewhere on behalf of the trust. In the case of SLV, that’s JPMorgan Chase Bank N.A. BlackRock charges investors 0.5% and pays fees to JPMorgan, which allocates the bars to the SLV account. In practice, this process may involve forklifts and high security trucks moving metal around London in the middle of a lockdown. To provide leeway, some bars can be “unallocated” -- meaning the custodian effectively promises the silver based on inventory elsewhere but doesn’t physically set it aside. SLV’s prospectus states the custodian will take “reasonable steps” so that no more than 1,100 ounces is unallocated at the end of each business day.

4. How much silver are we talking about?

Global ETFs, including the iShares fund, held 940 million ounces (29,000 metric tons) of metal on Feb. 1, according to data compiled by Bloomberg. That number jumped by 3.8% that day, the biggest daily increase since 2019. SLV owned more than 620 million ounces, about 60% of all ETF silver holdings and equivalent to almost half of total world silver consumption in 2019, according to data from research firm Metal Focus.

5. What’s the goal of the Reddit traders?

Many of the investors piling into SLV see it as a tool they can use to repeat the short squeeze that was engineered in shares of GameStop. In that case, a concerted effort to drive up the price forced hedge funds that had bet against the stock through short sales to spend billions to cover their positions. The idea is that if they buy enough silver through the ETF -- and buy physical silver in other forms such as coins -- they might create a shortage of the physical material. In theory, that could trigger a scramble for less liquid sources of metal that will only come to market at a higher price, sending ripples through the London over-the-counter market and beyond.

6. Will they be able to do it?

Boosting a commodity is a very different proposition than a single-stock share. Commodity markets are huge and their fungible nature -- all silver is essentially alike, while companies are not -- attracts traders seeking liquidity. Before the short squeeze in GameStop, its daily volume averaged about $50 million; silver’s average on the New York futures market in 2020 was closer to $11 billion. The global silver market has also been oversupplied for years, making a physical squeeze less probable. And data shows that there is no hedge fund net-short position in the silver futures market, meaning the Reddit theory could just be wrong. In fact, a backlash against silver was gaining momentum among posters on the Reddit board that kicked off the turmoil.

7. Has something like this happened with ETFs before?

In April 2020, the price of oil famously turned negative, and several ETFs were swept up in the disruption. The United States Oil Fund (USO) was the biggest and most famous -- it came under fire from regulators for shifting strategy multiple times in order to survive the historic turmoil. Some other leveraged funds were shut down by their issuers. There’s a big difference between these funds and SLV, however: The oil funds invested in futures contracts and derivatives rather than the physical product itself. In other words, USO was caught up in the turmoil, whereas SLV is being used to create it.

Reference Shelf

• QuickTakes on the oil ETF, disruption in the stock market by retail traders and Robinhood’s role in gamification of investing.
• Bloomberg’s Functions for the Markets shows how to monitor flows in precious metal-tracking funds.
• Silver won’t fall easily to the memelord assault, writes Bloomberg Opinion’s David Fickling.

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