Is The SLV Wired To Blow?

’m not real big on suspense, so I’ll tell you upfront, I think so. Once again, we may be about to find out what happens when regulators are asleep at the switch.

As of this writing there are 364 million shares of SLV outstanding. In the past five trading days (April 25 – 29) more than 755 million shares have been traded, and get this, more than 10 million ounces of silver were taken from the trust between the 26th and the 28th, taking available shares with them. From Stockhouse.com :

Note: Stockhouse.com is the only free website that I know of that accurately tracks the number of ETF shares outstanding and changes (wish I could say the same of my broker). Enter the ETF ticker with the suffix “.SO”

At what point does trading volume relative to existing shares become unbelievable?

Information on institutional holdings of ETF shares is also hard to find. but according to nasdaq.com, 86 million shares of SLV are held by institutions, but that does not include any holdings reported since April 1, 2011. And speaking of missing data, does anybody know where China Investment Corp’s 13F‘s are? The sovereign wealth giant filed its initial holdings with the SEC on February 5, 2010, but no additional data has been released. The SEC requires the form to be filed within 45 days of the quarter’s end.

The point is that the SLV has become one of the most heavily traded instruments on our exchanges and there is an all too finite number of shares. There’s at least some evidence that the SECs institutional holdings data is outdated and/or incomplete. What happens when all the shares are spoken for? If it hasn’t happened already (I suspect it has), it should soon…..

Then what?

Will the SEC suspend sales of the SLV? Will the SLV start trading at huge premiums to NAV? Will the SEC even notice?

I don’t know about you, but I’m going with “SEC will never notice,” because they have no mechanism in place to ensure “shares owned” doesn’t exceed shares outstanding (remember Mary Schapiro’s only qualification to Chair the SEC is her inability to recognize a Ponzi).

Obviously if SLV starts trading at huge premiums, it isn’t tracking the price of silver anymore. It will have a market dynamic unto itself. Suspending sales until more silver is deposited with the trust will immediately cause a run on physical silver the likes of which has never been seen before. The silver exchange on the COMEX will blow up in a matter of minutes, followed shortly thereafter by JP Morgan and the class structure of western civilization. If you don’t know how tight the silver supply is getting, take a peak at this chart from 24HOURGOLD:

Kudos to 24hourgold.com for doing a better job tracking the rapidly vanishing supply of registered silver than the COMEX!!!! (Hope it’s OK I stole a screenshot).

To make matters even worse, SLV trades options. Lots and lots and lots of options. So when the shares outstanding are all sold, there will be people with call options, who have bought the right to buy shares of SLV at a given price. Forcing cash settlement means the SLV no longer can claim to track the price of physical silver, because the purchase of silver by an authorized participant to create the shares to cover the options would have surely moved the price of the metal.

So once again America, ignoring the grim reality of the situation is the only logical course of action. The SEC knows all too well that that’s what porn sites are for. So unless somebody posts this on Pornhub……

I’m sure that Tyler Durden’s instincts will be proven correct again, when he stated thatBlackrock’s Kevin Feldman’s defense of the SLV was a red flag in and of itself. Blackrock is the sponsor of the SLV, and Kevin urged everyone to read the prospectus. That was probably not such a good idea. Be extra careful when you try to download the prospectus, I got the following warning:

Comedy ensued after using Firefox (safe mode) to view the prospectus:

“The sponsor does not exercise day-to-day oversight over the trustee or the custodian”

Which seems to conflict with Kevin’s letter:

“At BlackRock, we take the responsibility of protecting shareholder interests very seriously and spend a lot of time constructing our iShares products to help ensure they meet investor expectations.”

So in reality Blackrock takes protecting shareholders about as seriously as the US Department of Justice takes perjury. To his credit, Kevin did link to a list of bars the SLV holds in some vaults over in England. The list was prepared by JP Morgan, because if you can’t trust them regarding silver, who can you trust? Rather than spoil all the potential ways the SLV might not meet “investor expectations”, I thought it would be fun to make a contest of it (see comments).

The SLV pimps out the price action of the silver it holds to shareholders. It can terminate the trust for a long list of reasons, not the least insignificant of which is if the Authorized Participants (who actually own the silver) feel like it.

Suddenly everybody has an opinion of what the price of silver should be, but as JPM is now finding out, if you don’t have silver to sell your opinion doesn’t count.

I don’t wish any ill on SLV shareholders, but make no mistake, you don’t own silver. History has not been kind to people who made similar mistakes, and recent history should tell you no one is looking out for you.

Miscellaneous Fun Facts:

• In February, 2007 the author contacted the SEC via email regarding Countrywide Financial CEO Angelo Mozilo’s insider trading.
• In March 2007 the author applied for an SEC bounty regarding Angelo Mozilo’s insider trading (up to 10% of recovered amount) . Countrywide’s stock was trading at about $37 at the time. It would trade over $40 in May and implode to less than $5 by late 2007.
• On June 4, 2009 (27 months later) the SEC charged Mozilo with insider trading and securities fraud.
• In October 2010 Mozilo agreed to pay $67.5 million in fines to the SEC to settle the charges against him.A
• At its peak, Countrywide had a Market Cap of more than $26B. Angelo Mozilo has an estimated net worth of $600 million.
• The SLV currently has a Market Cap of approximately $17B.
• The author never received a bounty from the SEC, because the Dodd-Frank “Financial Reform” legislation repealed the previous SEC bounty program. Bounties can no longer be paid based on an outsider’s analysis of publicly available information.
• In 2010, the author applied for a job as an “abusive trading practices specialist” with the SEC. He received no reply.
• In February 2011, the US dropped its criminal investigation against Mozilo.
• Paybacks are a bitch.

Common sense (and a little math) tells me that the SLV is already a fraud. When that becomes obvious to all is anyone’s guess, but based on my past experience, neither the SEC nor the CFTC will recognize it until about two years after it implodes.