Today’s VERY IMPORTANT RANT TOPIC, the surging premium of the Sprott Physical Silver Trust, ticker PSLV on the New York Stock Exchange.
Sprott Physical Silver Trust
As long-time readers know, I have done more research on the five closed-end bullion funds trading in the U.S. and Canada than ANYONE. I owned Central Fund of Canada, ticker CEF, as far back as 2003, and have consistently recommended these funds to anyone seeking an alternative to PHYSICAL gold and silver. Central Fund of Canada is roughly half gold, half silver, has a $5 billion market cap, and has been trading since the 1960s. The fund’s founder, Phillip Spicer, is still its Chairman, while it’s very capable CEO, Stefan Spicer, is his son. I have 100% faith in Stefan’s stewardship of the Central Fund, which holds all its metal in audited, “Level 10 vaults” in various Canadian cities, as well as its newer “sister funds” the Central Gold Trust (GTU) and Silver Bullion Trust (SVRZF), both of which I own in my small “cash” account at Charles Schwab.
In recent years, maverick Canadian investor Eric Sprott launched his own bullion-only closed-end funds, the Sprott Physical Gold Trust, ticker PHYS, and Sprott Physical Silver Trust, ticker PSLV. These funds are identical to the Spicer funds in all ways except one very important difference, the ability to redeem your shares for PHYSICAL gold and silver. Such redemptions have limitations, principally related to minimum transaction size, but those minimums are much smaller than those purported by fraudulent ETFs such as GLD and SLV. In PSLV, for example, the minimum redemption amount is roughly 10,000 ounces of silver, to be sent to the holder in “London Good Delivery Bars” averaging 1,000 ounces. I have been acquainted with Eric Sprott for some time via the GATA organization, as well as his long-time partner John Embry, the most famous PM investors in Canada. These two men are highly principled, as dedicated to preserving shareholder equity as the Spicer’s. Consequently, I have 100% faith in these funds as well.
For nearly a decade, I have followed, in real-time, the premium/discount of these funds to their underlying Net Asset Value, or NAV. NAV is the market value of the fund’s gold and/or silver divided by the number of shares, and these funds have traded at premiums to NAV for nearly the entire decade-long PM bull market. I have seen them dip slightly below NAV for brief periods, such as the BOTTOM of Global Meltdown I in late 2008, but never for long, and never for more than a percent or two.
Conversely, the premiums have ranged from low single-digits to the mid-20s, peaking roughly three years ago but staying consistently positive thereafter, as opposed to GLD and SLV, which trade at DISCOUNTS to NAV of 3%-4%, which over time have inexorably expanded. Below is a table of the current premiums of the five closed-end bullion funds, which except for PSLV are trading in the low to mid single digits. Truth be told, premiums were closer to 10%-15% before “D-DAY” on November 9, 2010, and I believe part of the Cartel’s post “D-Day” suppression strategy involves keeping these premiums low, so as not to create a perception that PHYSICAL prices are dramatically higher than the fraudulent PAPER prices, particularly the bellwether Central Fund of Canada, by far the largest, most liquid of the five.
|Ticker||Name||Allocation||Manager||Premium to NAV||Mkt Cap (billions)|
|CEF||Central Fund of Canada||55% gold, 45% silver||Spicer||1%||$5.1|
|GTU||Central Gold Trust||100% gold||Spicer||2%||$1.2|
|SVRZF||Silver Bullion Trust||100% silver||Spicer||5%||$0.1|
|PHYS||Sprott Physical Gold Trust||100% gold||Sprott||6%||$2.1|
|PSLV||Sprott Physical Silver Trust||100% silver||Sprott||31%||$0.9|
Which makes the reason for this RANT, the recent surge in PSLV’s NAV Premium to 31%, that much more remarkable. Even as the Cartel’s post “D-DAY” suppressions lowered the premiums of these funds, PSLV’s premium has stubbornly remained above 10%, averaging 15%-18% during the second half of 2011. As the only redeemable silver trust (aside from the fraudulent SLV), managed by trustworthy individuals and stored in Canada, market participants are obviously confident that holding PSLV is equivalent to owning PHYSICAL silver, and in fact the 15% premium to NAV is not far off current premiums of PHYSICAL over spot for most transactions. See the table below of the distribution, by number of days, of PSLV’s NAV premium since the funds’ inception in October 2010, of which ALL the higher numbers (i.e. above 25%) represent the premium surge of the past week.
When PSLV officially became a year old in October 2011, it issued a blanket shelf registration for $1.5 billion, an enormous amount that theoretically represents about 5% of ALL above ground silver available on the planet. When this occurred, the premium dropped from the aforementioned 15%-18% range to roughly 12%, the lowest I had seen it in some time. Clearly, investors were worried that a deal would be priced at a significant discount to the market price, as Sprott delicately tries to balance the benefit of removing so much silver from global markets with the potential dilution of selling equity at a lower premium than the prevailing price/NAV.
I have been through numerous such deals as a holder of the Spicer funds, and despite the near-term price weakness they engender, have always supported such deals, which not only improve the GLOBAL supply/demand balance but are accretive to shareholders, in that every deal ever completed by the Spicer’s (and Sprott’s) have been at premiums to the funds’ respective NAVs. Moreover, as I predicted years back, dilution compared to the prevailing market price has been shrunk as the PM bull progressed, to the point that Sprott priced a PHYS deal last year AT the closing price the day the deal was announced. I believe this trend will continue until new deals are priced at premiums to the closing price, until of course supply is exhausted and new deals no longer possible.
Given this background, I want to discuss the incredible surge since mid-December of PSLV’s premium from roughly 15%-18% to 31% as we speak, including an explosive premium expansion last week from roughly 22%, per the article below.
Physical Silver Surges To Record 30% Premium Over Spot, In Backwardation
There really isn’t much to interpret from this phenomenon other than the obvious conclusion that the PHYSICAL silver market is tight as a drum. With the overhang of a $1.5 billion shelf offering, which if exercised would increase the fund size by 150%, it is truly amazing to see this kind of premium surge. I have spoken to Sprott’s management team countless times in the past, as well as Stefan Spicer, and am confident both are carefully watching the markets, seeking to price offerings at attractive levels when the opportunity arises, and in fact, GTU priced a $180 million offering in late October at roughly a 3% premium to NAV.
The problem with silver is that, precisely due to the aforementioned tightness, it is difficult to gauge whether an offering of such size could be executed at all. When PSLV priced a $575 million offering on November 3, 2010, not un-coincidentally days before “D-Day” on November 9th, it took more than two months to take delivery, including a significant amount poured after PSLV had purchased it. In other words, $575 million of PHYSICAL silver didn’t exist back then, and given that silver prices are roughly the same today, with demand significantly greater (2011 Silver Eagle demand rose 15%), supply stagnant, and the size of the shelf offering 3x larger, you can imagine the consternation of Mssrs. Sprott and Spicer about pulling the trigger on new, large-sized offerings.
From my standpoint, the 31% premium screams PHYSICAL silver tightness, and despite the current PM apathy, courtesy of the aftershock from “OPERATION PM ANNIHILATION II” in late December, I believe it’s only a matter of time before the silver market stair-steps higher in response to this obvious warning flag. There is NO DOUBT in my mind that the PM END GAME will involve shortages, if not the disappearance, of PHYSICAL supply, and given how small, and obviously tight the market is, I have even LESS DOUBT that such stress will show itself first in the silver market, and later in gold.
PROTECT YOURSELF, and do it NOW!