Remember my earlier post about backwardation and contango? Here's an update.
As to why the SLV fund is liquidating its physical holdings, look to the fund prospectus which basically states that if SLV has more shares short than long, then it will trade to the downside. In this situation its custodians must buy back SLV shares to absorb the excessive supply to get back to its tradable NAV. To do so, fund managers must sell some of their physical silver bullion thereby equalizing SLV selling into silver itself. This activity is magnified in levered funds such as AGQ.
Silver holdings in the iShares Silver Trust (SLV), the biggest exchange-traded fund backed by silver, decreased 7.59 metric tons to 11,013.75 metric tons as of May 2, according to figures on the company’s website.
The bottom line: Read the fund prospectus before investing any funds into levered ETFs. There is a lot of money to be made on both the long and short sides but be sure to have a SOLID understanding of how they work. I cut my teeth on the 2008-2009short etfs and paid my dues then. I can see the same thing happening in other instruments now.
Tuesday, May 3, 2011
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