What is going on in the hard money blogosphere? How on earth is paper getting confused with bullion?
Recently, not one but two prominent hard money-oriented blogs intimated that the stock known as Sprott Physical Silver Trust (PSLV) is more like the real thing than what it really is – a non-dividend-paying stock, aka a trading vehicle.
As we for whom every line in Casablanca is an old friend know, a stock is just a stock, a fund is just a fund, the fundamental things (always) apply…
Two days ago, Zero Hedge published a post by one of the Tylers titled Physical Silver Surges To Record 30% Premium Over Spot, In Backwardation.
However, the “physical silver” referred to in the title is simply “paper” silver, meaning said PSLV security. PSLV is essentially a closed-end fund that owns silver in Canada. Unless one owns a very large amount of PSLV, thus providing conversion rights once a month to physical silver, PSLV shareholders pay (generous) fees to sustain the fund and in return obtain nothing more than the right to sell the shares to someone else. Big whoop.
A more accurate title for a post would instead have been: ”Overhyped Paper Silver Vehicle Bulled To Unprecedented Premium Over Physical: Why Would Anyone Not Prefer The Real Thing?”
That’s the sort of contrarian title that has brought ZH so many fans.
Per the PSLV website, the premium to net asset value (NAV) closed at 32.25% Friday. Unbelievable.
The ZH post really consisted of two separate posts, one misguided and the other based in the real, or at least sensible theoretical, world. The first part of the post gets it wrong:
One of the main reasons why we have been not so focused on paper representations of real currencies (i.e., gold and silver) is that ever since the MF Global debacle, in which it became all too clear that if physical gold can be “hypothecated” via conflicting ownership, then there is no way that paper versions of precious metals are viable and indeed credible…
And for a good sense of what the “real” price of the metal is, not one determined by institutions whose interest it is to preserve the hegemony of paper, one can either try to procure gold and silver at a retail merchant, or one can look to the premium of a dedicated physical ETF over spot.
This of course misses the point that PSLV is paper and thus has an uncertain price relationship to physical. No proof or even evidence is adduced to support these assertions, because such proof or evidence is, to put it mildly, lacking. PSLV, which owns physical silver, is as much a paper investment as is a public REIT which owns real, physical properties.
Today I have checked three different venues with which to purchase physical silver. There may or may not be some shortages in some products, but I can buy all the silver bullion I want at single-digit premia to spot. And once I own it, I have no, or nominal, storage costs, unlike the PSLV shareholders.
(In contrast, the second half of the ZH post presents a possible way to take advantage of changes in market pricing. It derives from a Daily Capitalist article by Keith Weiner, who uses an arbitrage technique, as per the title of his post: The Arbitrageur: Silver In Backwardation. Now, whether Keith’s thesis is correct or not is not a topic in which I have any expertise, but I’ll take what is perhaps the most core investment technique- arbitrage- over almost anything else. Keith’s focus is on physical silver, not the PSLV security.)
It is not only a Tyler Durden who is in outer space on PSLV. Here is Harvey Organ from yesterday:
2. Sprott silver fund (PSLV): Premium to NAV rose big time to 32.25% to NAV Jan 7. 2012 WOW!!!!!
3. Sprott gold fund (PHYS): premium to NAV rose to a 6.4% positive to NAV Jan 7. 2012). wow
and take a closer look at the premium in gold…6.4%
physical metal is starting to distance itself from paper.The bankers are loathe to attack the Sprott funds. They are still shorting Central fund of Canada. Eric is still on the prowl looking for his silver.
If PSLV holders wanted to engage in old-fashioned arbitrage, here’s a modest proposal. Sell PSLV and get physical. I mean the real thing: cold, hard physical silver, preferably in your direct possession. It doesn’t matter at this point whether PSLV is “better” than SLV. Relative to actual Ag in your hand, PSLV’s investment merits at the current valuation are similar to Elaine Benes’s past passion for Jerry Seinfeld: Fake.