The silver episode

We are starting to see wild movements in the market, which unfortunately seem adequate in periods of high uncertainty, high leverage, high valuations and high concentration. The poster child these days is silver, but we can see movementa like these in other assets. On Friday, silver price in the U.S. fell 30% in a day. It was options expiration day, banks were massively short the metal, and they moved the market as if they were the masters of the Universe. And perhaps they are. In the bottom chart below, you can see the difference between the price of SLV, the biggest silver ETF, and its NAV. The difference between both is a staggering 24%. What does it mean? It means that the Net Asset Value per share of SLV (the sum of all silver bars divided by the number of shares minus the costs) is worth $93.52, but the price of each a share in the market traded at $75.44. Allow me to explain what probably happened: Banks took advantage of the fact that the price of physical silver market settled at 12 pm London time on friday at $103.19, while the futures market was still open in the US. Banks massively shorted the futures market on Friday to push the price in the U.S. as low as $75.44. SLV price tracked the futures market and was trading at $75, despite the fact its physical holdings were valued much higher. And now comes the best part. Banks bought the SLV shares at the bottom, demanded conversion into physical silver, closed their futures shorts, and will tender their silver in London at 103.19 making a killing in one day. But that’s not even the most incredible part: In the upper chart below, you can see the premium between the silver price in Shanghai and the price in the west. Almost $30/ per ounce more. The arbitrage opportunity is huge, if it wasn’t for the fact that exports out of China were forbidden, and there is no physical silver available for tendering. If you had doubts about the Efficient Market Hypothesis, these episode should eliminate them. And if you thought tha markets are rigged, this should confirm your thinking. It may not happen all the time, but it happens when it matters. Let’s see what happens tonight at 6 pm EST, where the silver market opens.

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