Spotlight on Silver Investment 2021

Chapter 2 - Exchange Traded Products

  • Silver exchange-traded products (ETPs) have been phenomenally successful in the silver market.
  • 2020 witnessed the largest annual increase, of 331Moz; early 2021 has seen holdings achieve a record high of 1,207Moz in early February.
  • Since 2006, more than 20 ETPs have been launched. In terms of ounces under management, the US is the most important market with 622Moz at end-March 2021, followed by Canada (198Moz), then the UK (134Moz).
  • In terms of custodians, London is by far the most important centre, with 725Moz allocated at end-March, with a significant gap to Canada’s 198Moz.
  • Early 2021 saw an unprecedented 110Moz added in just three days. Although some liquidations emerged, there were real concerns that London would run out of silver if ETP demand remained at a high level.

Introduction

Silver exchange-traded products (ETPs) have enjoyed phenomenal growth over the last year or so. This period saw two exceptional spells. March-July 2020 saw holdings rise by 302Moz, and in January-February 2021 holdings increased by 109Moz. In terms of the full year figures, global holdings in 2020 surged by a record 331Moz to a new high of 1.067 billion ounces. Last year’s gain was also comfortably the highest achieved since silver ETPs first launched in 2006. Investor interest in ETPs has so far been exceptionally strong in 2021, with holdings at end-February having risen to 1.18bn oz (yet another record high) before easing slightly in March.

The success of silver ETPs largely reflects a dramatic upsurge in interest among retail investors, having become the dominant players in this field. Prior to the launch of ETPs in 2006, retail investors looking to acquire silver had largely been restricted to purchasing coin and bars, collectively defined as physical investment. This activity has also witnessed significant growth, and although not strictly comparable, cumulative demand during 2010-15 stood at 1.6bn oz. However, ETPs have attracted a large swathe of new buyers, including those active in the stock market who might not have previously bought precious metals. As a result, there appears to be little sign of an adverse impact on physical investment by the success of silver ETPs. Their popularity among retail investors contrasts sharply with gold ETPs, where institutional players are far more prevalent. This, in turn, helps explain quite different trends in gold and silver ETP holdings. Retail investors tend to adopt a ‘buy and hold’ mentality, whereas institutional holdings can be more volatile.

Principal ETPs

At present, there are some 20 physically-backed silver ETPs. In this section, we look at the largest products and the key issuers by location. The location often differs from where the silver is stored; for example, while the US is by far the largest market by silver ETP issuer, the UK comfortably dominates as the physical storage location of the related silver bullion.

The largest ETP, by some distance, is the US iShares Silver Trust. Launched in April 2006, and with 575Moz in trust as of end-March, this fund accounted for half of global silver ETP holdings. It is one of three products that are listed on the NYSE Arca – the other two are Aberdeen Standard products. The next most important location by issuer is Canada. Five ETPs are managed here, the two most prominent being the Sprott Physical Silver Trust (with 131Moz under management) and the Sprott Physical Gold and Silver Trust (holding 60Moz of silver). Both are listed on the NYSE Arca.

In Europe, the UK ranks third behind the US and Canada by issuer and is dominated by WisdomTree. The company manages a number of silver-backed ETPs, the most significant of which is the WisdomTree Physical Silver product, launched in 2007. At end-March 2021, this held 99m oz of silver. It is listed on six exchanges, including the LSE and TSX.

Global Silver ETP Demand

Source: Bloomberg, ETP issuers

Staying with Europe, Switzerland and Germany are also home to prominent silver ETPs. Most significant is Switzerland’s ZKB Silver ETP, with 95Moz under trust. Introduced in 2007, this product is one of three ETPs that are traded on the SIX Swiss Exchange. In Germany, the Xtrackers Physical Silver ETC EUR is the largest of three silver ETPs based there. The fund holds 53Moz of silver and trades on XETRA.

Together, these five countries account for nearly all silver ETP issues. Just 1% is apportioned elsewhere, with one ETP listed in each of Australia, Turkey and Japan, for a combined total of just 14Moz under management.

ETP Holdings, by Issuer Location

Moz, end-period 2019 2020 Mar-21
US 392.5 600.1 621.9
Canada 122.5 157.4 197.5
UK 79.7 122.8 134.2
Switzerland 100.0 110.2 111.7
Germany 34.3 64.3 64.6
Other 6.7 12.1 14.2
Global Total 735.7 1,066.8 1,144.2

Source: Bloomberg, ETP issuers

ETP Custodians

The country where the ETPs are based, or indeed listed, and where the physical silver bullion is held can often vary. This year, the location of the custodial vaults has come into sharper focus as ETP demand has jumped, leading to concerns about the potential availability of metal.

The most important location for storing physical silver in respect of ETP funds has always been London, although its dominance has grown noticeably over the past 12-14 months. At end-2019, silver allocated in the UK accounted for 55% of the global total. By end-March 2021, this had risen to 63%. While most silver ETPs have benefited from growing interest over the past 5-6 years, most significant was the surge in buying of the US iShares Silver Trust product, much of which is actually vaulted in London.

At end-March 2021, 725Moz was held on behalf of ten ETP funds in LBMA-approved vaults. The largest of these, the iShares Shares Trust, had 472Moz held by its custodian J.P. Morgan in UK vaults, followed by WisdomTree, with 101Moz stored by its custodian HSBC, also in London. In the US, the iShares Silver Trust has a further 103Moz stored in J.P. Morgan’s Comex approved depository and is the only silver ETP to be vaulted in the US. Staying with North America, vaulted ETP holdings in Canada far exceed those of its neighbour. At end-March, physical silver held on behalf of five ETPs totalled 198Moz, the most significant of which is Sprott Physical Silver Trust, with 131Moz, stored with the Royal Canadian Mint. Elsewhere, Switzerland is home to 112Moz of allocated ETP silver, the majority of which is the ZKB Silver ETP with 95Moz.

ETP Holdings, by Custodian Location

Moz, end-period 2019 2020 Mar-21
UK 407.2 690.4 724.8
Canada 122.5 157.4 197.5
Switzerland 100.0 110.2 111.7
US 103.2 103.2 103.2
Other 2.9 5.6 7.1
Global Total 735.7 1,066.8 1,144.2

Source: Bloomberg, ETP issuers

Above-Ground Stocks of Silver

As touched on above, the recent jump in ETP demand has led to fears as to whether there are sufficient above-ground bullion stocks, should ETP holdings see a further sharp increase.

The first point to note is that there is a gulf between the total of silver above- ground stocks and the portion which can be quickly allocated against ETPs. In terms of the former, while it is extremely difficult to estimate the scale of above-ground stocks, a useful starting point is to look at cumulative silver mine production. As of end-2020, this was estimated at 59bn ounces. However, the stock that is held in fabricated silver products, including bars and coins, will be considerably smaller. This reflects the large scale of losses across a range of industrial and photographic products. For example, solar demand consumes around 100Moz/year, but very little of this material is recycled.

Even though above-ground stocks are difficult to pin down, there is no doubt that bullion stocks account for a small share of the total. At end-2020, identifiable holdings held in London, Comex and Chinese approved vaults, stood at a combined 1,694Moz. Furthermore, cumulative physical investment throughout 2010- 20 stood at 2.4bn oz. As a reminder, ETPs at end-March were 1,144Moz, making up 63% of the combined total. Although these stocks have been rising over time — for example at end-2017, they stood at 1,433Moz — the 18% increase over the past four years appears modest. However, is worth noting the strength of silver demand over much of this period. In particular, Indian imports have at times ramped up, with a combined 120Moz shipped from London to India during 2018-19 alone. Before looking at how much silver might be available for new ETP demand, one must consider where this silver is held.

Breaking down Identifiable Silver stocks

Looking first at bullion held in London, LBMA published that at end-March 2021, London vaults held a combined total of 1,143Moz.* Some 58% of this metal was allocated against silver ETPs. This is a remarkable change in a relatively short period. At end-2019, London vaults held 1,162Moz, with just 35% of this silver earmarked against ETPs.

* A data submission error led to the publication of an incorrect aggregate figure for the total silver held in London vaults in March. This has now been rectified and the corrected figure is 1,143 Moz as stated above. There is no link between this March reporting error and the activity in the silver market at the end of January.

Total LBMA Silver Vault Holdings vs Silver Allocated to ETPs in London

Source: LBMA, ETP issuers