It’s like the GBTC premium, but in Chinese silver

Amid a speculative frenzy in silver, the Shenzen-traded UBS SDIC Silver Futures Fund LOF has repeatedly halted trading, warned of an “unsustainable premium” in its share price, and paused primary-market subscriptions to limit cash inflows.

It has also warned that if the premium doesn’t effectively retreat by February 2, the State Development Investment Corporation (SDIC) will apply for additional trading suspensions.

Year to date, the fund is up 133%. Silver, in contrast, has rallied a more modest but still impressive 52% over the same time period.

It’s the GBTC Premium all over again

Before the SEC approved the conversion of Barry Silbert’s Grayscale Bitcoin Trust (GBTC) from an over-the-counter trust into an ETF, it only loosely tracked the price of bitcoin ($BTC).

Its brief yet famous “GBTC Premium” occurred when the fund traded for more than double the value of the corresponding $BTC.

Indeed, during periods of bullish demand for $BTC price exposure via a severely limited set of securities trading on US exchanges, the price of GBTC exceeded 130% the value of its $BTC holdings on June 1, 2017 and again on September 1, 2017.

Incredibly, retail investors bid a premium for GBTC for months, allowing accredited investors to enjoy a nearly riskless arbitrage by giving Grayscale $BTC directly and waiting a discreet interval of a few weeks to receive GBTC shares at its premium-free net asset value (NAV).

Indeed, the GBTC premium persisted from August 2015 through late February 2021. At that time, investors doubted Silbert’s ability to convince outgoing SEC Chairman Jay Clayton and incoming Chairman Gary Gensler to approve GBTC’s conversion into a spot ETF.

Eventually, an August 29, 2023 decision from the US Court of Appeals for the DC Circuit ruled in Grayscale’s favor that the SEC’s denial of its trust conversion was arbitrary and capricious.

After trading at a substantial discount-to-NAV since late February 2021 — even as low as half the value of its NAV by December 2022 — its discount slowly narrowed and eventually neared parity with its NAV as its ETF conversion date arrived.

Speculators turn ravenous for sole Chinese silver fund

The UBS SDIC Silver Futures Fund LOF is the only silver fund trading on a major Chinese exchange, and its premium has been rising all year.

It reached a staggering 60% today and had the exchange not halted trading to limit its price, it might have even traded higher.

Read more: Crypto traders finally get gold — at all-time highs

Of course, long-term precious metal investors will never receive compensation from the SDIC for this premium above the fund’s holdings of silver futures contracts.

The only way to make money after buying at a premium is to hope that other investors will pay an even more lavish and irrational premium in the future.

Paradoxically, this game of greater fools has worked over the last few weeks. Whether and how long it will persist, however, is a matter of frenzied debate in Shenzen before the fund’s next trading un-halt.