By Joe Wallace

A flood of money into one exchange-traded fund has helped drive the surge in silver prices, underscoring the influence ETFs can exert on commodity markets at times of rampant demand among individual investors.

Retail investors on forums such as Reddit's WallStreetBets have migrated toward silver in recent days, generating huge inflows for BlackRock Inc.'s iShares Silver Trust, an ETF commonly known by its ticker, SLV.

It took in a net $868 million Friday, its biggest one-day influx since it was created in 2006. A further $511 million entered the fund Monday, when silver futures prices posted their biggest one-day advance in over a decade and hit an eight-year high.

Silver prices retreated Tuesday, falling more than 5% to $27.62 a troy ounce, after CME Group said it was imposing stricter margin requirements on futures for the precious metal, which would make them more expensive to trade on its Comex exchange.

The slide hit companies that mine silver, which had rallied in recent days, with shares of First Majestic Silver Corp., Hecla Mining Co. and Fresnillo PLC all lower.

Shares of SLV -- which manages over $18 billion in assets, according to BlackRock -- dropped almost 7% Tuesday, but remain up 2.5% for the year.

SLV, which is backed by bars of silver in vaults in London and New York, now sits on an enormous pile of the precious metal. ETFs have absorbed the equivalent of 84% of the billion-plus troy ounces of silver in vaults linked to the London Bullion Market Association, according to Bank of America Global Research. SLV is the largest of these funds.

Individual investors buying SLV have been the driving force behind the silver-price rally, said Ross Norman, chief executive of information service Metals Daily. "It's a very big number in a very short space of time," he said.

SLV has traded in an orderly manner throughout the period of heightened interest, a BlackRock spokesperson said.

ETFs are a popular way for mom-and-pop investors and day traders to speculate on silver prices without touching the metal. All it takes to invest in SLV is to buy shares in the fund on the New York Stock Exchange.

When demand jumps for the ETF, it can set in motion purchases of the underlying metal. It works like this: When appetite for SLV rises, so does its share price. Broker-dealers authorized by the ETF to create new shares in the fund then have an incentive to do so. To create those shares, dealers must deliver bars of silver to the fund, which first involves buying the metal if they don't own enough already.

Although silver is in ample supply, traders said difficulties could emerge in moving the metal to where it is needed in time to meet rampant demand, including from SLV. Spot silver prices rose above forward prices in London on Monday, a sign traders were trying to attract new metal into the market and encourage buyers to delay their purchases.

In another dislocation, futures in New York rose to a large premium over prices in London, signaling potential problems shipping enough silver to the U.S. to deliver against expiring contracts. A similar disconnect between prices in the two trading hubs emerged in gold in spring, caused by the grounding of passenger planes that transport bullion around the world.

That prompted a scramble by traders to fly gold to New York to cash in on higher prices there. It is harder to take advantage of the arbitrage opportunity in silver because the metal typically moves by container ship, a much lengthier process, one trader said.

The interest in SLV echoes the frenetic buying of gold ETFs when the yellow metal climbed to a series of all-time highs last summer. At the time, some investors blamed the increasing popularity of easy-to-access ETFs for contributing to heightened volatility.

Another illustration of the ability of ETFs to sway commodity markets came last spring, when individual investors betting on a rebound in oil prices piled into the United States Oil Fund. In late April, when May contracts for benchmark U.S. crude oil turned negative, USO controlled 30% of the June contract, Goldman Sachs Group said at time.

To be sure, ETFs weren't the only factor behind the recent jump in silver prices. Huge trading volumes in silver futures Monday suggested professional investors were attempting to profit from retail interest in the metal, traders said.

Write to Joe Wallace at Joe.Wallace@wsj.com

(END) Dow Jones Newswires

02-02-21 1109ET