Are Silver ETFs Increasing Market Volatility?

I have been wondering for the last few years if ETFs are increasing volatility in the stock market. This seems even more acute in the commodities market for things like gold, silver, corn, etc. The recent high volatility in the silver market and the high volume of silver ETF shares seem to support my thoughts.

In my inMessment Game I purchased 36 shares of iShares Silver Trust ETF (NYSE:SLV). My thought was to add a small portion of precious metals to my portfolio as a means of diversification. I chose silver for three reasons. 1) Silver seems to be a useful commodity that will continue to have strong demand. 2) I wanted to watch silver and learn more about it. 3) Silver was in a bit of a slump in January of 2011.

Jan 14, 2011, I bought in at $27.74 per share. I was shocked (in a happy way) to see the price skyrocket to $48 by the end of April. Up over 50%. At one point my SLV holding was up over 68%.

Then by May 5 it had dropped sharply back down to a price of $33.72, nearly a 30% drop. I started to wonder if I should sell out but I kept my position in SLV.

If you want to buy actual Silver coins or bars you would go to a local dealer or go online someplace like Then you select the amount you want to purchase by weight and you end up with silver you can hold in your hand.

Selling the silver is done in the same way. Take it to a local dealer or you can sell it online as well. When buying and selling online, you will also have to pay for shipping and insurance.

ETFs make it easier to quickly buy an sell things that would normally take a little more time, thought and effort. The iShares Silver Trust EFT (NYSE:SLV) has the following stated description:

The objective of the iShares Silver Trust is for the value of the shares of the iShares Silver Trust to reflect, at any given time, the price of silver owned by the iShares Silver Trust at that time, less the iShares Silver Trust’s expenses and liabilities.

So the iShares idea and the idea behind other silver ETFs is to let traders easily buy and sell an equivalent to real silver. When you read the description it sounds as though, from an investment point of view, it is nearly the same as buying silver. It is supposed to track the same price as an ounce of silver.

The ease of trading ETFs is why I think they may be contributing to increased volatility in the market. Let’s take a look at some of the numbers in the SLV ETF.

  • Last Price: 34.95 as of 6/17/2011
  • Market Cap: 12.89B as of 6/17/2011
  • Shares: 368.7M
  • Ounces of Silver in Trust: 309,486,239.400

I do not fully understand these numbers. If you multiply the shares by the price you get the 12.89B. But if you multiply the ounces by the share price you get just under 11B. This will be something I continue to research and find out how they can sell a “share” that represents actual silver held in trust.

Here is a graph that shows the SLV EFTs (NYSE:SLV) from Jan 3 to Jun 17. You can see the spike in April and the plunge in early May.

The bottom part of the graph shows the volume of shares traded. You can see that the volume spikes at the same time that the price spikes. The the volume goes even higher when the price crashes in early may.

On May 5 volume hits a high of 295M shares traded that day. That means that just over 80% of all SLV shares were traded that day. That is amazing to me! In concept that also means that 10 or more tones of Silver were traded that day.

I am still learning but it seems to me that the rise and popularity of ETFs will only add to market volatility. I know there are futures markets and other ways that silver and other commodities can be traded. But I think ETFs are more easily traded and more accessible for the average investor.

So, is increased volatility a bad thing? I guess I lean toward thinking it is. But if it is bad, then maybe ETFs give the average investor a way to get in and out of the market so they can minimize or even take advantage of that volatility. This is another hard thing to think about.

For now, I will keep my SLV position in my inMessment Game and keep watching. At this point it is the best performing security I have, even with the crash of early May.

What do you think? What affect do you think EFTs have on market volatility?

This and other articles on this blog are for entertainment purposes. I am doing the best I can but I am still very much in a learning process. These posts are an effort to share this learning process only and should not be considered financial advice.

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