BlackRock has warned of potential shortages in the prospectus of the world’s largest silver ETF following an attempt to squeeze the market by Reddit forum WallStreetBets.
Earlier this month, the $17bn iShares Silver Trust ETF (SLV) was highlighted by WallStreetBets as the best way to attempt to short squeeze the silver market.
This led to investors pouring a record $1.5bn over two days trading in early February before seeing a near-record $712m outflows in the week after as it became clear any attempts to move the entire physical market were relatively futile.
Despite this, however, Reddit traders have done enough to make BlackRock tweak the prospectus to stress that authorised participants “may not be able to readily acquire sufficient amounts of silver” necessary for the creation-redemption process which is pivotal when an ETF is traded.
“In such circumstances, [SLV] 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,” the prospectus said.
In other words, in this event when authorised participants cannot match investor inflows or outflows, BlackRock has warned SLV may be forced to suspend trading on the primary market.
If this occurs, SLV will continue to trade on the secondary market, however, as the prospectus stated, it could lead to wide premiums or discounts to NAV depending on demand.
This becomes even more interesting when one considers the amount of the precious metal held in physically-backed silver ETFs. According to BullionStar, as much as 83% of the silver market in London vaults is held in silver ETFs alone, as at 5 February, highlighting the potential risks involved if inflows start to pick up once again.
In a move to corner the market in late January, the WallStreetBets Reddit forum argued silver should trade around $1,000 an ounce instead of its current levels at $25 adding it is “one of the most manipulated [markets] on earth”.
This drove the precious metal above $30 an ounce to its highest level since February 2013, however, the run was short lived with silver falling back the next day.
As Jeffrey Currie, global head of commodities research at Goldman Sachs, said: “It is now nearly impossible for someone to corner the silver market.
“In the current environment, a co-ordinated surge in investment by retail investors into the silver market would simply raise volatility and generate small regional dislocations in supply-demand dynamics.”
