Q&A: How Are Authorized Participants Shorting SLV Shares?

In Ed Steer’s daily gold and silver newsletter (subscribe here), one of the readers asked the following obvious but important question: “Please explain in detail how “authorized participants are shorting SLV shares in lieu of depositing the metal.”  I do not understand how selling something you do not have makes up for silver that is supposed to be deposited.

Editor Ed Steer in charge chose to have the question answered by silver analyst Ted Butler (being the authority on this matter). This is Butler’s answer explanation:

“SLV and GLD are exceptionally unique securities in that they are open-ended trusts that promise to be backed by set amounts of silver and gold metal for each share created or outstanding. Further, they are unique in that shares can be converted into metal for redemption when done in basket amounts and by authorized participants (APs).

When there is net new buying in either, new shares are created and actual metal must be deposited in amounts equal to the new shares created. That is the clear intent and language in the prospectus of each. The only way to circumvent the necessity of depositing metal when new shares are created by net new buying is if the shares sold have been sold short.

By selling shares short into net new buying, the short seller can circumvent the requirement to deposit metal and, instead, simply hold  a short share position and avoid depositing metal. But this cheats all the holders of SLV and GLD because shorted shares are not backed by metal when the prospectus guarantees there must be metal backing.

When I confronted BlackRock (SLV‘s sponsor) about this sometime back, they said there was nothing they could do about it because publicly traded securities could be shorted, but they avoided the matter of insufficient metal backing in the trust.

The problem is that the temptation to short shares in lieu of depositing metal is greatest when physical metal is most unavailable, which is when buyers are most interested that the trust having full metal backing. A large and increasing short position in shares of SLV, in particular, indicate a developing shortage of metal.”

In addition, Ed Steer notes that he believes that the physical metal itself is available in good delivery form somewhere on Planet Earth from a willing seller.  The only question is of price.  If the APs actually had to go out there and bid the price up to find these willing sellers, you can imagine what the price of silver would be at the Comex close today if they were really forced to go out in the free market and get it.  And it’s for that very reason that they don’t.

Courtesy of Ed Steer and Ted Butler

Receive these articles per e-mail

Subscribe for the free weekly newsletter and receive 3 papers about physical precious metals investing