What's Up With the Silver ETF?

What's up with silver?

The iShares Silver Trust (SLV) fluttered today on trader talk that it has become a lot more expensive to short at Goldman Sachs.

What does that mean?

Normally, prime brokerage clients — mostly hedge funds — can call a shop like Goldman Sachs and say, "Sell short 10,000 shares of the SLV," and Goldman — and others — will make that market. How? They have enough inventory, and they have enough clients that are long SLV [SLV 44.121 1.121 (+2.61%) ] to enable them to do that.

But when a lot of traders look to short something, the price to borrow will go up. And that's what happened: traders tell me that the price to borrow the SLV is now about 300 basis points. That's a 3 percent charge. To put it in perspective: the cost to borrow is typically far less than that, say about 70 basis points. Three hundred basis points is a lot of money to borrow, and will likely discourage many from trying to short.

It should come as no surprise that there are a lot of traders trying to short the SLV. Three months ago, silver was less than $3 an ounce...today silver is $4.45...a 50 percent gain in less than three months!

Can you short the SLV now? Sure, you can find another firm who will short it for you, or you can go and try to borrow it yourself. But it's likely just as expensive.

Or you could use options on the SLV. You can buy a put on the SLV, or sell a call. But don't kid yourself: it's going to be very expensive to use options here as well.

Why did this happen? Well, silver hit $4.50, a nice round number, just like $1,500 gold. It's likely a lot of mental stops were hit.