BOSTON A record $1 billion outflow from the iShares Silver Trust (SLV.P) in the week ended Wednesday helped feed silver's torrid price decline, just as the fund's earlier inflows aided the prior rally.
Many more small investors can trade the iShares exchange-traded fund than participate in the precious metals futures market, and that can exacerbate the volatility of day-to-day price moves, investors said.
"The ease of access from exchange-traded products can be the tail that wags the dog," said Roger Nusbaum, chief investment officer at Your Source Financial in Phoenix, Arizona. ETF trading and share redemptions "can be a disruptive force in the short term, but it is the sort of thing that will flame out."
Silver's five-day losing streak that cut prices by almost a third did indeed "flame out" on Friday. Spot silver gained as much as 5 percent and the iShares fund rose 2.3 percent to $34.48 on the New York Stock Exchange.
With volume of over 188 million shares, the silver ETF was the second-most actively traded U.S. equity on the day, trailing only Citigroup (C.N).
Investors had added $726 million to the silver ETF in 2011 before yanking $1.6 billion over the past two weeks, according to iShares manager BlackRock (BLK.N). Inflows prompt the ETF manager to buy silver while outflows require selling.
BlackRock said the ETF is not a major factor in the silver market. Net inflow of $2 billion over the past 12 months represented less than 1 percent of mined new silver in 2010, said Leland Clemons, head of U.S. iShares capital markets. "Trading is a result of the rise in spot silver, not a driver of it," he said.
"Any suggestion that current creation and redemption activity in SLV is exacerbating the volatility, or driving the spot price, of silver is inaccurate. SLV was designed to track the price of silver and even in these volatile markets, that is exactly what it has been doing," Leland added.
Despite Friday's bounce back, silver is heading for its worst week since the Hunt Brothers collapse in 1980. Spot silver prices shed 25 percent this week as higher futures margin requirements prompted speculators to unwind bullish positions. Silver peaked at a record high of $49.51 an ounce on April 28.
Lipper data released late on Thursday showed the world's largest silver-backed exchange-traded fund, whose assets now total $13.3 billion, faced a double whammy of net outflows and a plunge in silver for the week ended May 4.
Then on Thursday, the fund tumbled 12 percent to $33.72 with 294 million shares changing hands, following silver's biggest one-day drop in dollar terms since 1980. That was nearly five times the fund's 50-day volume average.
"Margin calls are eating the little guys alive, forcing them to give up their dreams of a silver-coated world," said ETF analyst Carlos Alexandre at CXA Markets in Dallas.
Friday also saw brisk trading in options on the iShares silver fund. About 862,000 puts and 933,000 calls traded, more than double average daily turnover, according to options analytics firm Trade Alert. On Thursday, a record 2.2 million option contracts changed hands on the fund, three times the average daily volume.
"Option speculators are out in a big way in the weekly May $34 and $35 puts, protecting positions and in the weekly May $35 and $36 calls, looking for a bounce," said TD Ameritrade chief derivatives strategist Joe Kinahan.
"An investor does not need a lot of capital to purchase these short-term options, and so it is allowing speculators to play for a one-day move in a very volatile underlying security," he added.
The iShares ETF's price at Thursday's close was a record discount of almost 9 percent compared with the fund's published net asset value. For more, see: link.reuters.com/wux96h
BlackRock said the silver ETF, along with many commodity and international equity funds, commonly closes in U.S. trading at a price above or below the published net asset values.
That is because the net asset value is calculated only once a day, based on prices in the underlying markets, which may have closed while U.S. trading continued. In the case of silver, the NAV is calculated based on the London fix at 12 noon (1100 GMT).
On Thursday, for example, the price of silver and the ETF's price continued to tumble after noon London time, prompting the announced discount.
"When that happens, the ETF's price represents the most current fair-market value for silver, more up-to-the-minute than the NAV," BlackRock's Clemons said.
(Additional reporting by Doris Frankel in Chicago and Daniel Bases and Jennifer Ablan in New York; Editing by James Dalgleish and Dan Grebler)