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BlackRock Silver ETF: Another Shortage Warning

Headwinds for Silver
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EDITOR NOTE: There are a lot of mixed signals regarding SLV, the biggest silver-backed ETF on the market, and recent target of the Redditor short-squeeze horde. Part of this confusion had to do with the realization their efforts did not “directly” impact the actual silver market, and that perhaps, the process was a bit more complicated than they initially thought. Following Goldman Sachs’ Jeff Currie’s statement that SLV is a mere drop in a much larger bucket, a short-squeeze would be nearly impossible. However, there’s a twist to this story: BlackRock Silver SLV can’t issue any more shares due to a shortage in the actual metal. Ironically, as this news broke, the whole Redditor raid caused massive outflows from a market that may be about to rise anyway due to shortages in the real market! There isn’t enough supply of real metal to back new issuance in any of its paper substitutes. And in the coming months, we may see the effect of this shortage play out. It just comes to show that taking a longer-term view on the real economy and holding the actual metal--in our case, non-CUSIP silver--is a much more prudent strategy than following the chaotic advice of a Reddit feed. 

The Reddit crowd may not have taken full control of the silver market in the end, but they did enough to rattle the biggest exchange-traded fund tracking the metal.

The ETF at the heart of a recent day-trading storm -- BlackRock Inc.’s $17 billion iShares Silver Trust (ticker SLV) -- posted a near-record outflow of $712 million in the past week, after absorbing $1.5 billion the prior week in its biggest-ever inflow.

Amid the back-and-forth, the prospectus for SLV -- which is physically backed by silver -- has been updated to warn that the fund’s authorized participants, who work with the issuer to create new shares of the ETF, may be unable to acquire enough of the metal. As a result, the trust “may suspend or restrict the issuance” of baskets of shares, according to new wording in the risk section of the prospectus.

The outflows and the new warning follow a tumultuous few weeks for SLV. After day traders from Reddit’s WallStreetBets forum descended on the likes of GameStop Corp. and AMC Entertainment Holdings last month, the craze spread to silver. Cash poured into SLV after a post on the platform declared the metal “THE BIGGEST SHORT IN THE WORLD” and encouraged traders to buy the ETF.

It looks like the WSB moves may have worried them “and they’re being safe here by writing in that it may have to halt creations,” said Bloomberg Intelligence analyst Eric Balchunas. “It definitely raises concern about whether the ETF will function properly if it were to keep growing.”

BlackRock didn’t immediately respond to a request for comment.

SLV is up just over 3% this year after posting a 47% gain in 2020. The fund’s price jumped to a 5% premium over its net-asset value at the height of the recent buying as the ETF rallied more quickly than its underlying holdings.

If basket issuance is halted, it’s likely that SLV will trade at a premium again, given that authorized participants won’t be able to create new shares to meet a pick-up in demand, according to Dave Nadig.

“Anytime new issuance is impeded in any way, if there is exogenous demand, you’ll see a premium,” said the chief investment officer at data provider ETF Trends. “They’re just giving themselves options for an unpredictable future.”

Originally posted on Yahoo! Finance

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