I just wanted to flesh this out on a new thread. So let's limit this to SLV. Now I guess this works by certain approved entities depositing physical silver with the trustee in sufficient quantity to create a basket of shares. The more metal deposited the more shares. This of course works in reverse. You can deliver a basket of shares and and take physical silver out.
Now we'll bypass the argument that SLV doesn't have any real physical silver and assume that things are working the way that they are supposed to. So I guess the problem is when a short sale occurs on a borrowed share. You than do not have full backing for all the shares. My response to that is so what. In the first place the trustee is not responsible for nor perhaps even aware that additional shares are being "created" in this way. This is occurring at the broker level. So the trustee can't be expected to require additional silver to be deposited for shares that it's not creating. Anyway, all the gold & silver backed trusts have this problem. They all have shares shorted and thus aren't fully backed. In fact for something like Sprotts' PSLV the problem is even worse because of the premium where you know for a fact that the NAV of the silver in the fund is only a percentage of the dollar value of the fund.
If you and I have control of all 30 candy bars between us and these candy bars are held by a third party, and the guy down the street has no candy bars but thinks the price of candy bars will go down, he borrows 5 candy bars (sells short) from the third party knowing he must cover those candy bars in the future at an unknown future price. No new candy bars have been created. The 3rd party still has all 30 candy bars. The only thing created is a risk contract on the future price of candy bars.
Naked shorting occurs when that guy from down the street borrows more then 30 candy bars from the 3rd party, or more candy bars are borrowed then exist, but this still does not create more candy bars, it just creates a bigger risk contract and a possible default situation.
He is saying that it is a fractional banking system, though in this case a fractional silver system and that they are going to hold enough physical to stay out of trouble. At least that is my understanding. JMHO