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Why Squeezing iShares Silver Trust Is Doomed to Fail

By Dan Caplinger - Feb 1, 2021 at 5:05AM

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WallStreetBets should find a better target for its next move.

The Reddit group WallStreetBets had huge success in January, using its crowdsourcing power to send shares of GameStop (GME 8.43%) into the stratosphere. Already, many investors are trying to figure out where WallStreetBets will focus its attention next, and hints that the group might try to create a silver squeeze sent prices of the semi-precious metal sharply higher late last week.

Over the weekend, many tweets and messages suggested that iShares Silver Trust (SLV 2.74%) could be the focal point of efforts to take the WSB movement beyond GameStop. However, there's a structural element involved with iShares Silver Trust that makes it almost impervious to a short squeeze -- and investors could find that out the hard way if they seek to use the same tactics they did with GameStop to send its share price higher.

Assortment of silver bars and coins.

Image source: Getty Images.

How the GameStop squeeze worked

To understand why a typical short squeeze wouldn't work on iShares Silver Trust, it's useful to understand exactly what happened with GameStop. With any regular company, there's typically a fixed number of shares outstanding at any given time. Companies can issue additional shares by getting approval from its board of directors to do a secondary stock offering, as we saw fellow squeeze stock AMC Entertainment Holdings (AMC 2.51%) do. But for the most part, supply of shares stays relatively constant.

With GameStop, those who wanted to squeeze short-sellers did two things. They bought shares of GameStop stock, sometimes holding them in accounts in which the stock was then unavailable for short-sellers to borrow. Some also bought call options on GameStop, which in turn prompted the institutions that make markets in options to buy GameStop shares in order to hedge their exposure.

The result of these moves was a dwindling number of sellers, which sent the share price higher. That in turn led more short-sellers to want or need to cover their positions, making available shares even scarcer. That effect snowballed into the massive move in GameStop stock investors saw last week.

Shares on demand

The reason a squeeze on iShares Silver Trust won't work is that its structure is fundamentally different from a regular stock. Technically, the silver investment vehicle  isn't an exchange-traded fund, as it doesn't comply with some of the securities laws that govern ETFs. However, in one respect, it shares an important attribute that ETFs have: the ability to create and redeem shares at will.

Specifically, the terms of the iShares Silver Trust allow authorized participants to issue or redeem large blocks of shares, known as baskets. To create a basket of 50,000 shares, an authorized participant merely has to deliver the appropriate amount of silver -- currently, about 46,450 ounces. Similarly, an authorized participant can deliver 50,000 shares to the trust and demand to receive the same corresponding amount of silver bullion in exchange.

This mechanism prevents shares of iShares Silver Trust from climbing too far above or below the corresponding value of silver bullion. For instance, say that investors tried to squeeze short-sellers by purchasing large amounts of iShares Silver Trust shares. The price would rise, eventually exceeding the value of the underlying silver bullion corresponding to those shares.

Authorized participants could make a risk-free arbitrage profit by purchasing silver bullion on the open market and delivering it to the trust in exchange for shares. It could then sell those shares at their higher price, which would be more than it paid for the silver bullion.

Moreover, if short-sellers needed to cover their positions, they could work with authorized participants to create new shares. Once those new shares were in place, the short-sellers could deliver them to their lenders in satisfaction of their obligations.

A more concerted effort

If WallStreetBets or other groups of investors want to do a silver squeeze, they won't be able just to concentrate their efforts on iShares Silver Trust. Only by squeezing the entire physical silver bullion market could they hope to raise prices above the board and take away the escape valve of arbitrage-based share creation. That's a much larger and more challenging operation, but anything less is doomed to fail.

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Stocks Mentioned

iShares Silver Trust Stock Quote
iShares Silver Trust
$20.27 (2.74%) $0.54
GameStop Corp. Stock Quote
GameStop Corp.
$99.19 (8.43%) $7.71
AMC Entertainment Holdings, Inc. Stock Quote
AMC Entertainment Holdings, Inc.
$13.08 (2.51%) $0.32

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