A record $1-billion (U.S.) of outflow from the iShares Silver Trust 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," Roger Nusbaum, chief investment officer at Your Source Financial in Phoenix, Arizona, said. 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, as spot silver gained 4 per cent and the iShares fund rose 2.1 per cent in midday trading on the New York Stock Exchange.
With volume of over 160 million shares, the silver ETF was the second-most actively traded U.S. equity on the day, trailing only Citigroup.
Investors had added $726-million to the silver ETF in 2011 before yanking $1.2-billion over the past two weeks, according to iShares manager BlackRock. Inflows prompt the ETF manager to buy silver while outflows require selling.
BlackRock said the fund is not a major factor in the silver market. The fund's net inflow of $2-billion over the past 12 months represented less than 1 per cent of mined new silver in 2010, Leland Clemons, head of U.S. iShares capital markets, said. "Trading is a result of the rise in spot silver, not a driver of it," he said.
Despite Friday's bounce back, silver is heading for its worst week since the Hunt Brothers collapse in 1980. Spot silver prices shed 25 per cent 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 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 per cent 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," ETF analyst Carlos Alexandre at CXA Markets in Dallas said.
The fund's price at the close on Thursday was a record discount of almost 9 per cent compared to the fund's published net asset value. BlackRock said the silver fund, along with many commodity and international equity ETFs, commonly close in U.S. trading at a price above or below their 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 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.