Redirecting

Monday, January 10, 2011

Silver Irony - PSLV, SLV

I should have given this post a hysterical, hyperbolic title, like "SPROTT'S PSLV - PHYSICAL SILVER TRUST - ADMITS TO NOT OWNING PHYSICAL SILVER!"  But as usual, my goal is to educate, not spread hype, fear and misinformation.

From Sprott Asset Management today, (manager of PSLV): 

"TORONTO, Jan. 10 /CNW/ - Sprott Asset Management LP is pleased to provide investors with an update on the delivery status of silver bullion purchased by the Sprott Physical Silver Trust (NYSE ARCA: PSLV, TSX: PHS.U) ("Trust"). 

As of November 10, 2010, the Trust had contracted to purchase a total of 22,298,525 ounces of silver bullion. As of December 31, 2010 a total of 20,919,022 ounces of silver bullion had been delivered to the Trust. The Trust expects to take delivery of the final 1,379,503 ounces of silver bullion by January 12, 2011 and will subsequently publish the serial numbers of all bars held by the Trust on its website: www.sprottphysicalsilver.com

"Frankly, we are concerned about the illiquidity in the physical silver market," said Eric Sprott, Chief Investment Officer of Sprott Asset Management. "We believe the delays involved in the delivery of physical silver to the Trust highlight the disconnect that exists between the paper and physical markets for silver.""

Reminder:  PSLV is a closed end fund - that means that new shares cannot be created by anyone except the fund's manager - Sprott.

So let's get to the irony:  One of the most repeated urban legends of the internet is that SLV doesn't actually own physical silver, or doesn't own all of the physical silver that they claim too.  (It should come as no surprise to regular readers that I believe that SLV holds 1) only physical silver bullion and 2) holds all of the bullion that they claim to hold.)  Eric Sprott, in a fit of genius, capitalized on this hype by launching his own fund - PSLV - that holds only "physical silver" - he was even smart enough to name it the Sprott Physical Silver Trust.  I admire Sprott for this genius - he capitalized on the fear and hype, and managed to launch his own fund to compete with a dominant existing product.

There's only one problem:  PSLV, by Sprott's own admission today,  doesn't actually hold all of the physical silver bars that they are supposed to! PSLV has now been conclusively proven to hold promises for silver.  SLV, on the other hand, despite all the fear and paranoia, has never been proven to lack the silver that they claim to hold.  In fact, the holdings are even audited, and you can view the audit report online.

Talk about irony - PSLV exists largely because internet-miseducated investors feared that SLV was a terrible product.  PSLV trades at a significant premium to it's Net Asset Value (more than 11% at the time of this writing!), and yet, has been proven to demonstrate the exact flaw - not actually holding physical silver -  that it was supposed to solve. Meanwhile,  it has never been demonstrated that SLV actually has that flaw!

Now, in an effort to avoid rehashing old nonsense, I want to remind the critics of a few things: 

1)  This post is about holding PSLV vs holding SLV, not about holding  ETFs vs holding physical bullion.  I will never be able to convince the doubters that SLV is as good as holding bullion,  and if you want to hold it for your grandchildren, it's probably NOT as good as holding bullion.  This piece is written specifically for the "SLV = bad, PSLV = good" crowd.

2) This news out of PSLV today is not my opinion - it's a fact - PSLV owns CONTRACTS for silver.  

3) Who cares? I certainly don't -  I'm sure Sprott will get the silver on Wednesday when he's due to.  My point is that while people have been running around like chickens with their heads cut off screaming "SLV SUCKS, BUY PSLV,"  it was PSLV which in fact owned paper silver.  

4) Please do not post excerpts of the standard disclaimers in the SLV prospectus.  As I illustrated clearly on a previous thread, PSLV's prospectus has nearly identical disclaimers. 

5) You can buy whatever you want to buy - I don't care - it's your money.  I happen to own SLV.  I have previously tried to short PSLV, but was unable to borrow shares, and thus could not short PSLV.  To me, it makes positively ZERO sense to pay an 11% premium to NAV for PSLV, and I would short it vs. an SLV long if I were able to.
-KD

18 comments:

Nemo said...

I believe the claims of the "SLV doesn't have the silver" crowd are not about contracts vs. physical. The claim is simply that SLV loans out their silver.

In other words, some (or "most" or "all"; pick your conspiracy) of the physical silver that has been delivered to the SLV trust has been loaned out to people who shorted silver and had to make a physical delivery. Through this mechanism, the same physical silver may well have been delivered multiple times to the SLV trust. (That is, the silver gets exchanged for new SLV shares, then loaned out to someone, then eventually exchanged for more new SLV shares.)

If you believe -- as Sprott's apologists do -- that the "paper silver" market is ripe for a meltdown, then you might well believe that SLV will be unable to deliver the actual silver when that meltdown strikes.

The goal of PSLV is to be able to identify a specific physical silver bar, with no other claims attached, for every N shares of the fund. That is, if you can collect N shares, you can absolutely, positively redeem them for one of those bars, regardless of what is happening in the "paper silver" market.

If you believe Sprott, the only reason PSLV does not yet have all of its physical silver is that the physical market is so tight. If true, this is evidence for his claims, not against them. Also, for all of those "paper contracts" he owns, he intends to take delivery this week.

It comes down to a very simple question: If one entity were to purchase *all* of the outstanding shares of SLV and attempt to redeem them for physical, would they actually get all of that silver, or would the silver market implode? I do not know the answer to this question. What I do know is that PSLV is structured such that owners can always exchange for physical silver. It is just taking a while for Sprott to acquire that much physical.

I do not like being an apologist for cranks, but I do think you are perhaps dismissing some of their claims too quickly. I do not know whether SLV loans out their silver. Do you? Do you think it could possibly matter?

Kid Dynamite said...

Nemo - from the SLV FAQ:

1) "Does the Trust lend or have the ability to lend silver
from the portfolio?

No. The custodial agreement does not allow lending, and
the Trust does not lend silver from the portfolio."

http://us.ishares.com/content/stream.jsp?url=/content/en_us/repository/resource/silver_faq.pdf&mimeType=application/pdf

Now, of course this FAQ is not a legal document. Could it matter if they loaned it out? Absolutely. If they don't as they say they don't, then I think all the nonsense is put to rest. But you can never satisfy the "cranks" on this point. I don't think we have access to the custodial agreements.

2) you wrote: "It comes down to a very simple question: If one entity were to purchase *all* of the outstanding shares of SLV and attempt to redeem them for physical, would they actually get all of that silver, or would the silver market implode? I do not know the answer to this question. What I do know is that PSLV is structured such that owners can always exchange for physical silver. It is just taking a while for Sprott to acquire that much physical."

this is the ENTIRE point. first, i believe that if all SLV shares were redeemed, the silver would be there - that's how SLV is structured also.

HOWEVER, we know now that this is absolutely, positively NOT the case for Sprott!! He doesn't have all the silver backing his shares! that was EXACTLY my point. THat's why I wrote this piece today! Does it really matter? probably not, because he will get the silver soon, and because I can't think of any reason any rational person would ever redeem their PSLV shares (big fees to do so, it would take a SERIOUS apocalypse to make it the right decision).

3) you wrote: "The goal of PSLV is to be able to identify a specific physical silver bar, with no other claims attached, for every N shares of the fund. That is, if you can collect N shares, you can absolutely, positively redeem them for one of those bars, regardless of what is happening in the "paper silver" market."

I don't think that's what the goal of PSLV is at all - SLV already does that, but N is just a larger number.

The goal of PSLV is a) to capitalize on fear and hype by essentially replicating the same product, with the key difference being b) that SMALLER redemption units are required - you don't need 50k shares - THAT is the key difference. of course c) it doesn't really matter anyway - it's all psychological, because there's not a likely scenario where you would actually redeem your PSLV!

4)what I am honestly wondering is why Sprott doesn't buy and redeem SLV if he wants silver so badly! (and no, I do not believe that the answer is that he knows that SLV doesn't hold silver - I don't think Sprott believes that).

5). you wrote: "If you believe Sprott, the only reason PSLV does not yet have all of its physical silver is that the physical market is so tight. If true, this is evidence for his claims, not against them. Also, for all of those "paper contracts" he owns, he intends to take delivery this week."

I'm actually wondering what kind of contracts he bought. i don't know what his agreements were. Maybe he bought futures in the first place! I haven't found the details. let me know if you did.

Kid Dynamite said...

follow up, re #3 and #4 - obviously, individuals with N shares (N = 50,000) of SLV cannot redeem from the trust - they need the help of an authorized participant

Purewater said...

This isn't a revelation. E Sprott repeatedly said during interviews that it would take a few months to get their silver.

The real question is how does SLV add millions upon millions of ounces each week when it takes PSLV several months to get their silver. I'm not saying they don't have it, just curious how their APs can get it so easily when others can't.

Nemo said...

"No. The custodial agreement does not allow lending, and
the Trust does not lend silver from the portfolio."

Well, that certainly makes it more "conspiracy theory" than I thought...

4)what I am honestly wondering is why Sprott doesn't buy and redeem SLV if he wants silver so badly

A good question, since this would appear to be a straight arbitrage from his point of view (paying less for SLV than he can issue PSLV). Perhaps it is not so easy to become an "authorized participant"?

Ah, I think I see. PSLV only holds "London Good Delivery" bars. So maybe the conspiracy theory is that the physical silver in the SLV ETF could be fake... What does the SLV prospectus say about the kind of silver it accepts?

It is too bad Sprott does not allow PSLV-to-physical conversions in both directions. It would be very interesting to see the PSLV-to-SLV premium, if any, under that arrangement.

Kid Dynamite said...

Nemo - Sprott wouldn't need to become an authorized participant, he'd just need one to do the trade for him (on his behalf).

re: London Good Delivery Bars - you can read SLV's prospectus for yourself:

http://us.ishares.com/content/stream.jsp?url=/content/en_us/repository/resource/prospectus/silver.pdf&mimeType=application/pdf

page 28: "Silver deposited with the custodian must meet london good delivery standards"

If PSLV were arb-able like SLV, I think they would trade at parity - except for some potential adjustment for variation in tax treatments. PSLV holders seem to think that they have a tax benefit from holding PSLV - I'm not an accountant or a tax lawyer, but I tend to think that if you're doing things 100% on the up and up, the IRS will get their cut regardless. I may be wrong about fine print in the structure with respect to this though, and if anyone really knows (not "Read it on the internet" knows) please do weigh in.

Kid Dynamite said...

tax follow up - Sprott's prospectus says that if you file a special form, you should get long term cap gains rates if you hold for more than a year, as opposed to SLV which is supposed to get hit with a 28% "collectibles" tax

Devore said...

PSLV, being a closed fund, intends to take delivery of its contracts. Once it has all its physical silver, it will have them all in storage, with no risk like SLV, always 1:n correspondence to units outstanding.

It's investment objectives that matter. For a metals trade, SLV is sufficient. For an option to redeem physical, hold long term like you might with bullion, or at least the safety of owning a chunk of, SLV just won't do. Should the mythical COMEX crunch ever materialize, price of physical will shoot up, while price of promises to deliver will be heavily discounted. Holder of one will have a chance to profit, holder of the other will be sucking wind.

Kid Dynamite said...

Devore: What are you talking about? SLV owns physical bullion - and nothing but physical bullion, backing each and every one of its outstanding shares. (I mean, unless you believe that everything is a giant lie, that they weren't really audited, that they are violating the terms of their prospectus, etc etc etc)

SLV owns no "promises to deliver," although again, the point of this article is that it seems PSLV does! (which should be resolved in two days, according to their press release)

Anonymous said...

Well, I invest in PSLV because it's cheaper. I can buy 2 shares of PSLV for every share of SLV. Both tracks Silver prices fairly well. PLUS, PSLV has also outperformed SLV so far. I don't understand your hatred towards PSLV. Not everyone who invests in PSLV thinks there is some great conspiracy regarding SLV. I also like SLV, but not for long term investment purposes.

Kid Dynamite said...

Holy cow Anon@ 4:05... I can only assume this is troll bait, and that you are one of my friends playing a joke on me, but I'll answer anyway.

First, I don't hate PSLV - I hate that people have been brainwashed into paying an 11% premium for something. This is money that you are almost guaranteed to lose if you hold PSLV long enough, and there are enough follow on offerings which exhaust the supply of "suckers" needed to buy at a premium and maintain the premium. The premium will shrink when Sprott sells more shares. If it doesn't, he'll sell more shares again until the premium eventually shrinks.

second, you can buy more shares of PSLV but that is 100% irrelevant. If PSLV did a 1 for 2 reverse split, and made each share "worth" twice as much silver as it's currently worth, do you think anything would change? I'll answer that for you: no. nothing changes. This is a very very very important investing concept that you need to understand, and it applies to all stocks, not just PSLV and SLV. It just happens to be even easier to demonstrate with PSLV because we know its NAV.

Onlooker said...

LOL, that sounds like my Aunt Suzie who thinks that the price of a mutual fund share is relevant. Good grief. Sorry, but if you don't have even that level of basic investing knowledge you shouldn't be playing in the big kids sand box. Somebody's liable to sell you a bridge or two.

As for premium, it's hard to know what the "normal" range of premium will be for PSLV, but once we have enough of a track record you can buy when it's low and sell when it's high to get some extra juice out of it; theoretically at least. It's easier said than done. But at least you can avoid buying at a steep premium.

Purewater said...

Central Fund has had a significant premium for at least 5 years. Based on that history, there's absolutely no reason to think PSLV will go down to a minimal premium or discount until the gold/silver bull market is over. Shorting it is a fool's game, IMO.

Kid Dynamite said...

Purewater - I have owned CEF in the past. Of course, like PSLV, their fund cannot be kept in line via arbitrage mechanisms. They are a two in one product though - exposure to both silver and gold, so it's a little harder to make a simple comparison, but not much harder: investors would be better off owning SLV and GLD than CEF. About 8% better off, per the recent 8% premium for CEF.

I owned CEF when they did a secondary last year... instant 5% hit overnight. Yes, we can HOPE that there will be a renewed supply of people to be willing to pay the premium, but that's not the kind of thing I'd want to count on.

look at PHYS... that's all you need to know. the days of 20% premium have been replaced by 2.5% premiums! Because the supply of people willing to pay a premium for no good reason has been exhausted by secondary offerings - not because the bull market is over.

If i could short PSLV vs SLV, I'd do it all day long. that's all I'm saying.

Anonymous said...

GTU is selling at a discount which is a rare event.

Anonymous said...

Kid-

About the PHYS premium story, the secondary offerings are all kinds of fun and games for some but definitely NOT for the people who bought in at 20% premiums. However, what's way more interesting to me is the correlation between short interest and the magnitude of the premium- they're clearly correlated. Which leads me to my next point- where the hell are these people finding this stuff? And how much are they paying to borrow it? The short PHYS/long GLD (or IAU, whatever) trade seems great, but how practical is it to do? I'm watching the short interest on PSLV spike, but it's still pretty small relative to the size of the fund. Am figuring we'll see a secondary offering in a few months.

Kid Dynamite said...

Anon - I was told that it's very hard to borrow, with tiny pieces available at a cost of 7-10%.

UrbanAnalyst said...

Kid,
That IS ironic, nice snag.

Sprott working the conspiracy theorists and charlatans into the ground one 11% premium at a time is fine by me.