NB: I’ve included a Big Retailer example to illustrate the similarity in strategy; Big Retailer referred to as the fictitious “ARMEX”
Here’s how the Big Retailer (“ARMEX”) plays silver where the key is the big premium difference between selling physical metal and the quoted (paper) silver spot price
I. “ARMEX” Case
- ARMEX buys product wholesale (coins, bars, whatever) for their physical stock, to sell on. ARMEX buys that product near spot price or below.
- Same time ARMEX sells silver futures short (put options) and/or futures contracts on the COMEX.
“Can’t lose” Strategy:
a. If silver’s price rises they profit on the physical sales + premium over spot. The puts are leveraged and they expire worthless, but ARMEX only loses the premium on the put, which is offset versus the greater gains on physical sales, plus the sales premiums over spot. If the silver price falls, they are hedged by their short (put) position in the futures market. b. And, if silver spot goes down, the put options expire in the money and ARMEX is left with physical stock, which they lower the sales premium on when the market is slow, but still make a profit.
II. iShares SLV Silver “Trust” Case
- ‘Investor’ provides funds to SLV for silver ounces
- SLV buys silver at spot, whether allocated or unallocated
- SLV “authorized participants” may sell (hedge) unallocated silver via COMEX futures
- SLV takes fees in part from proceeds
- SLV invests rest of proceeds in Wall Street market shares or higher interest asset
NB: On the odd occasion where a COMEX buyer may stand for delivery (on no occasion has an “authorized participant”* ever demanded an SLV “basket redemption”) SLV may settle in funds (cash) with the COMEX for COMEX delivery for the contracts it has sold. There is no case of SLV ever satisfying the ‘50k share block rule‘. As such IShares SLV is not functionally a Trust, but rather a hedging operation to maintain an unrealistic silver spot price when compared to the actual price for the physical metal.
Essentially, with SLV iShares we have a silver carry trade somewhat analogous to definition of the gold carry trade (which I have written about) with a few important differences. Also note similarity to the so-called ARMEX strategy, where SLV is a derivative instead of the real thing. Plus, the silver carry trade is easier to game and “less regulated” with SLV being a derivative and not a real deliverable commodity. That’s because silver is generally not held as a monetary metal by central banks (even though it is a monetary metal) and recall that the Bullion Banks are the culprit here.
The bullion banks game silver on behalf of certain governments, the LBMA, and the Bank of International Settlements. Hence the somewhat higher volatility for silver spot.
Since silver and gold have challenged the monetary hegemonic role of paper money for centuries, major central banks and especially bullion banks wish to keep the price of the monetary metals suppressed.
As described by Ferdinand Lips years ago, the bullion banks — some of whom are Federal Reserve primary dealer banks — have intent to profit by manipulating the trade in monetary metals, rather than profit by an increase in the value of those monetary metals.
Bullion banks, the IMF, Bank of International Settlements and major central banks consider an overall increase in the price of monetary metals – especially silver – as a threat to the Silver Users (and for example Tesla) as well as an endangerment to the false illusion of fiat’s value; an illusion which the monetary cartel must attempt to maintain at all costs.
But there is a further benefit. When a shareholder’s shares in the “Trust” are hedged by an “authorized participant” – which includes JP Morgan – the dollar proceeds from re-assigning those third party-owned shares (called rehypothecation) can be leveraged at least nine times by the Authorized Participant. In other words, if J P Morgan sells COMEX futures relating to iShares SLV silver holdings for $1M, JP Morgan can place $100K in reserve while investing $900K in another debt instrument. Nice work. …if you can get it. Another option is that SLV may lease the physical silver in its possession, but no independent third party has ever verified ‘for-the-record’ that IShares Silver Trust acts in that capacity.
If there is no other takeaway from the above, the major point is that JP Morgan and BlackRock will not allow dollars to sit idly by in the form of SLV silver ounces, whether allocated or not; JPM/BlackRock will put those dollars to use as represented by those ounces – allocated or not – as Bullion Banks see fit.
*As of this writing, ABN AMRO Clearing Chicago LLC, Barclays Capital Inc., Citigroup Global Markets, Inc., Credit Suisse Securities (USA) LLC, Goldman Sachs & Co., HSBC Securities (USA) Inc., J.P. Morgan Securities, Inc., Merrill Lynch Professional Clearing Corp., Morgan Stanley & Co. LLC, RBC Capital Markets, LLC, Scotia Capital (USA) Inc., UBS Securities LLC, Virtu Americas LLC, and Virtu Financial BD LLC are the only Authorized Participants. –SLV prospectus Feb 8, 2021