What will happen to silver ETF's?

[theFNG]

If mining companies take a dump due to junk corporate bonds and sell offs of assets for cash I'm not sure what will happen to ETF's that trade paper silver. These funds are tied to the spot silver price correct? You are basically putting in a future order for x-number of ounces to be mined when you buy these stocks.

If mine output goes down, then the existing contracts will not be fulfilled on time, this should make the contracts worth less than physical silver because there is no guarantee you will get physical and a higher rick of default.

But the contract price is tied to physical spot, which should go up in price in this case, because less is being mined. So now your no guarantee paper is worth more and a mine has more incentive to fill the contract. This decreases the risk of default.

How will this play out? Will they continue to over sell contracts that cannot be filled? Will there simply be a point where contracts will never be filled? Or will contracts always be filled because they are based on spot price?

 

[Pirocco]

A future 'order' nearly never ends in delivery of the commodity.
Because it's ment to hedge a planned transaction in the cash market, and some1 that orders 10000 ounces on the cash market and wanna lock the cost of the planned transaction, wants to get/pay 10000 not 20000 ounces.
The futures market 'order' was ment to cause an immediate price change in the favorable direction same time as the cash market order was given. Those that later on pay the altered price, then pay the dollars that the hedge needs to compensate for eventual price changes.
Ex a dealer orders on the cash market 10 1000 ounce bars from a miner to deliver and pay next month. The dealer wants to be sure of what it's gonna cost him (ex $14 / ounce, total to pay $140000) so he then also takes 2 (2 x 5000 = 10000) long positions on the futures market.
If by next month the price would have increased to $16, he will pay $2 / ounce more ($160000), but the account of his futures market long positions will have accumulated $2 x 10000 = $20000 during the $14>$16 price increase, and he his cost will be the $160000-$20000=$140000, being the cost he had planned.
If the price would have dropped from $14 to $12 instead, he will pay $120000, but his futures market account will have lost $20000 during the price drop, and his total cost will still be $120000+$20000=$140000, again the planned cost, with the windfall gain given away due to the hedge.
That's what hedging does: preventing loss, and preventing gain too. It's the opposite of what speculators do, and that's also the goal: preventing being inflicted losses / extra costs by speculators.
And that miner that the dealer orders from, well, is just happy to take 2 short positions, to lock what he'll receive for the 10000 ounces. And this way, the longs and shorts both appear, together forming the futures contracts. Once the 10000 ounces got delivered and paid, the futures market positions lose their existence reason, and get... annihilated (ended or an opposite order that brings the net total exposure back to zero).

And then we have the ETF's that are physically backed, like the biggest one of all ETF's: IShares Silver Trust. Those buy/sell silver as to make sure that their share price tracks the spot price. Otherwise the ETF would be reduced to a zero sum market on its own, not exactly what their shareholders want haha.

 

[theFNG]

A future 'order' nearly never ends in delivery of the commodity.

But is that the underlying intent of the transaction? Is it implied that it will never be delivered, that it's not physical silver? Is it just a bet on spot price only?

I understand what you laid out, just trying to figure out the hype about not having enough phyz for the paper.

The system works now because there is no fear of shortage. What happens when the dealer hedges and his future order goes up the $20000 but it's because phyz spot has gone up since phyz is scarce, not paper? Then no one will buy his future paper order and the system crashes.

I am not talking about actually running out of silver but simply not having the capital to get it out of the ground. Like a crash of mining companies.

 

[bron suchecki]

You are basically putting in a future order for x-number of ounces to be mined when you buy these stocks ... Will they continue to over sell contracts that cannot be filled? Will there simply be a point where contracts will never be filled? Or will contracts always be filled because they are based on spot price?

Most ETFs are physically backed and have nothing to do with futures or "contracts of ounces to be mined". The market maker sells the ETF shares and buys the silver, which it delivers to the vault. If a market maker cannot buy physical silver on the spot market then they would not quote a price. The price would then rise above spot, the market makers would raise their spot bids to induce people to sell physical and both price would rise until someone agreed to sell physical.

Usually leveraged ETFs use futures contracts, but then these are not represented as physically backed and move in line with futures prices.

 

[Ipv6Ready]

You are basically putting in a future order for x-number of ounces to be mined when you buy these stocks ... Will they continue to over sell contracts that cannot be filled? Will there simply be a point where contracts will never be filled? Or will contracts always be filled because they are based on spot price?

Most ETFs are physically backed and have nothing to do with futures or "contracts of ounces to be mined". The market maker sells the ETF shares and buys the silver, which it delivers to the vault. If a market maker cannot buy physical silver on the spot market then they would not quote a price. The price would then rise above spot, the market makers would raise their spot bids to induce people to sell physical and both price would rise until someone agreed to sell physical.

Usually leveraged ETFs use futures contracts, but then these are not represented as physically backed and move in line with futures prices.

Two great answers.
Reading everything about PM I thought especially Silver was traded by some weird quasi mystical divining system, like the future market on silk worms lol.

 

[theFNG]

Ok good. So the majority of ETFs are basically a vault. They give you stock that represents your portion of the vault holdings. If this is the case then all the hype about not having enough physical silver to cover the stock issued is total BS. Thanks for clearing that up.

 

[Silverpv]

Ok good. So the majority of ETFs are basically a vault. They give you stock that represents your portion of the vault holdings. If this is the case then all the hype about not having enough physical silver to cover the stock issued is total BS. Thanks for clearing that up.

According to my understanding of it, this is the thing most people exaggerate is registered vs eligible storage. Specifically, registered is the ratio of what's actually in the vault (registered) vs. what they can buy (eligible). Lots of metal moved from registered to eligible creating this huge ratio between oz. registered vs etf price. The muscle will be flexed when someone buys more than what's registered and requires delievery but no one thinks that will ever happen when it has to pull from eligible.

 

[bron suchecki]

The registered and eligible stocks thing relates to US Comex futures prices only. ETFs are different and generally store their metal in London.