Just read Kids latest post. Trying to figure this one out. Any comments on this?
Eric Sprott is one of the leading voices of the silver bull market. His minions worship him, and lap up his every word.
But Sprott’s words and his actions are out of sync. His words say that there is a shortage of physical silver, that it’s a matter of time before silver prices skyrocket, that silver bulls will continue to take physical silver out of the market and that the result will be a supply squeeze and higher prices. His actions defy logic: despite managing a closed end silver fund, $PSLV, which trades at a huge premium (almost 20% lately) to Net Asset Value, indicating ample demand for the shares in the fund, Sprott refuses to buy more silver bullion and do a secondary offering of PSLV shares, which is what he should want to do if his goal is to expose the shortages of silver he preaches about constantly.
Remember: since PSLV is a closed end fund, not an ETF, it has no creation-redemption mechanism* which would allow the market to arbitrage NAV differences by adding or subtracting metal in exchange for shares. The only one who can add silver to the fund is the manager: Eric Sprott – which he could do via a secondary offering by buying silver bullion and selling more shares in the fund. This is what closed end funds should do when they trade at a premium. The premium indicates demand for shares, so they sell more shares and take more metal off the market. It’s what $CEF (Central Fund of Canada, a gold and silver bullion closed end fund) has done a number of times, and it’s what Sprott himself just did a few days ago in his gold closed end fund $PHYS – again, not for the first time. PSLV shareholders are clearly indicating that Sprott has the ability to buy much more silver for the PSLV coffers.
All silver bulls should be wondering why Mr. Sprott doesn’t do a secondary offering for PSLV and help their cause by taking more physical silver out of the hands of those they view as evil manipulators. Every silver bull should be wondering why, despite PSLV’s shares trading at a full 20% premium to its NAV (that means that investors are willing to pay $120 for every $100 worth of silver!), Sprott refuses to utilize the demand to help the silver bulls’ cause. I would encourage silver bulls to take every opportunity to ask Sprott why he is acting so strangely when it comes to (a lack of) PSLV secondary issues, and why he doesn’t want to accumulate more silver bullion for the fund, potentially accelerating silver prices and the resolution of the demand/supply imbalance in the silver market that he talks consistently about.
disclosure: I am long $SLV and short $PSLV. I have no direct exposure to the price of silver, just to PSLV’s premium.
postscript: There are some other factors to consider as well:
1) Sprott’s hedge funds own a significant chunk of PSLV shares, which they have been selling at the huge premium to NAV (as I’ve written about numerous times: 1) the filing 2) the first sale 3) the latest sale). If Sprott does a secondary offering for PSLV, the premium to NAV may suffer, and his hedge funds’ performance may suffer. Instead, he’s selling his funds’ shares to investors in the marketplace! Silver bulls should be quite annoyed by this, as PSLV is not helping accumulate any physical silver bullion, and not helping to squeeze the folks that the Silver Mafia always accuses of shorting massive amounts of paper silver.
2) Sprott knows that the investors buying his fund are confused by the meaning of the premium to Net Asset Value, and that this premium can be used to manipulate their sentiment! The Silver Mafia has managed to convince PSLV holders that they are paying a premium because it’s better than the competition. I wrote a whole post about this already, which is mandatory reading for interested parties.
3) Sprott has made a “promise” to PSLV shareholders that he will not do a secondary offering that will whack the premium of PSLV like he did with PHYS previously. The problem is that this is a promise he can’t keep: he can’t control the premium for PSLV, other than by continuing to talk about how tight the silver market is while he refuses to do anything about it. Not wanting to hurt PSLV’s premium isn’t a “reason” to not do a secondary – it’s simply evidence that Sprott wants to manipulate the NAV premium. Let’s be clear: Eric Sprott is one of the people in the driver’s seat who can potentially expose all of the problems he alleges are evident in the silver market: He has the ability to take large quantities of physical silver off the market for his fund. Yet he doesn’t do so…
4) Related to the last point in #3: perhaps another reason Sprott doesn’t want to do a secondary for PSLV is that it will expose all of his “hype” as false: it might prove that there isn’t a problem getting large amounts of silver, and end up being the Dose of Reality that kills the Silver Goose, so to speak. If the opposite is true, and a large silver purchase would have a drastic effect on silver supplies, then bulls should be SCREAMING for Sprott to help expose the supply shortages with his actions – not with his words. (and yes, Silver Bugs, I know that you’ve read that it took Eric Sprott a long time to get the silver for PSLV’s initial offering. Guess what: it took a long time because Eric Sprott arranged for it to take a long time, so that he could trumpet about how long it was taking, and confuse you Silver Bugs! We know this because Sprott structured the purchase of the silver himself, and the counterparty did not default on the contract, as Sprott’s own Investor Relations department will tell you. The silver for PSLV’s initial purchase was delivered per the terms that Eric Sprott arranged.)
Sprott could also get silver by buying and redeeming $SLV (or buying and standing for delivery of COMEX futures). Of course, this would be yet another potential feather in the Silver Bugs’ cap if their SLV fears (And COMEX fears) are legitimate and there are problems getting silver out of SLV (I don’t think the fears are legitimate, by the way, and I think that Eric Sprott knows that SLV has the silver which they claim to have: he cites their inventory in his presentations about the state of supply and demand in the silver market) – which could be exposed by Sprott. This is yet another reason silver bulls should want Sprott to do a PSLV secondary.
Of course, Sprott can just go buy bullion elsewhere if he doesn’t want to test the COMEX/SLV theories.
5) Keep your eye on the ball here: If you’re a silver bull reading this, you want Eric Sprott (and everyone else) to buy as much physical silver as possible. You should ask him why he isn’t doing this. That’s the point: simple.
6) *footnote: the “creation/redemption mechanism” is what people in The Business call the ability to create and redeem ETF shares daily in exchange for metal. On another blog several weeks ago, a novice reader accused me of “lying” when I wrote that PSLV doesn’t have a creation/redemption mechanism to keep the price in line. $PSLV, despite having a clause in their prospectus to allow for redemptions of shares for bullion, does not have a creation/redemption mechanism as the term is normally used in The Business, and neither does $CEF – although CEF also has a clause that allows for redemption of shares at a discount to NAV (80%)