As spot silver prices reach and break new highs each week, several market insiders have speculated that increased demand might bring down SLV, the most prominent silver ETF. While the fund is supposed to be backed by physical reserves of silver, the size of the silver market and investor demand for the ETF mean that those reserves may be taxed. While it is unlikely that a problem will emerge, it is worth consideration by market participants.
Under the terms of most ETF structures, the fund is required to hold enough physical silver to back up the shares that are sold in the market. As each new share, or block of shares, is created, more silver must be held. With silver hitting new highs, investor activity has surged. Some investors believe the silver market is in a short term bubble, while others think a favorable gold to silver ratio means the market has plenty of potential.
The fund sponsor of SLV has guaranteed that the needed reserves are being purchased and the process is well in hand. Reserves are help in London, and are the responsibility of the fund's custodian in the UK. The exception to the safeguards that are in place is that while the custodian must inspect the silver it holds in reserve, no chemical testing is done to confirm purity levels. Should the silver that is being held be fraudulently delivered, it might go undetected and cause a problem.
It is important to remember that the silver market is relatively small. When compared to other metals markets, the silver market is quickly dwarfed. What this means is that a supply squeeze could drive prices even higher and cause a problem in acquiring sufficient reserves. This may have already happened.
Ultimately, SLV is sponsored by iShares, a major financial player that is not likely to allow a problem to develop. Given the number of ETFs they have in circulation, a crisis of confidence would be too costly to risk. That being said, market participants are wise to monitor develops as the price of the commodity continues to climb.
The turmoil in the silver, gold, and oil markets in recent weeks sheds some light on the volatility of commodity trading. An ETF is a great way to diversify one's commodity holdings, but it does not complete reduce one's overall risk. Make sure to review ETF research for information about the ETF's ratings and analysis.
