PSLV Bulls In Deep Space 9-9-9

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 “hypothecatedvia 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.



12 comments to PSLV Bulls In Deep Space 9-9-9

  • Keith Weiner

    Doc: that arb (i.e. sell PSLV and buy silver) makes sense. The challenge is having one account that can do both, otherwise you have a naked short in PSLV in a stock brokerage account and silver somewhere else…

  • Keith Weiner

    I just checked into it, PSLV is marked “Hard to Borrow” by Schwab. It makes sense, if it were easy to arb then someone or lots of someones would have already done it long before a 30% premium occurred.

  • Keith Weiners comments makes the case for a PSLV premium of 30% quite simply. Those who have bought PSLV are, most of them, not selling. At all. That’s why its so hard to borrow, and shorting therefore doesn’t occur. Which means that the PSLV price is for all intents and purposes correct, due not to the silver price rather to the scarcity of PSLV shares.

    I think Sprott will start issuing more PSLV, maybe in small additions throughout the coming year, to not hurt the premium with a “shock”, rather to diminish it over time. At the same time, more PSLV becomes available to investors. I think this is especially likely if the silver price starts rising in a nice (hopefully non-parabolic this time) continous fashion. That would make current PSLV-holders winners as well as new ones. And everyone gets that desirable “redeemability” which many question exists in SLV, or even on Comex contracts for that matter.

    I buy the physical rather than PSLV, but I suspect that large investors may like PSLV so they don’t have the storage issue.

  • Oh and Keith – I wrote a rather long essay in response to your “Fractional reserve banking is not the problem” post last year and sent to Jeff, but maybe he misplaced it or didn’t think it was fit for publication.

    Just for the record, fractional reserve banking IS the problem :)

  • Hans and Keith

    So far as I can see, one can buy unlimited amounts (for an individual of ordinary means) of physical silver at BullionVault at spot plus a little, or at 2 well-known online sellers (and buyers) of metal coins and bars. Thus PSLV’s current price definitively does NOT reflect the cost to purchase physical silver at this time.

    Note I did not advocate selling PSLV short. It is not marginable. I advocated that if one holds PSLV shares, one could consider taking the guaranteed arb profit and selling them and instead buying physical silver in one form or another at a much fairer premium to spot. I think that if one does not do that, then one is probably a trader- but owning a clearly-overpriced security.

  • Addendum to Hans. You said that most PSLV shareholders are not selling. As of 9/30/11, there were 57 million PSLV units (shares) outstanding. The average daily trading volume is 637,000 shares.

    Somebody is flipping lots and lots of PSLV!

  • Keith Weiner

    Doc: good point, that’s a different kind of arb and I would certainly recommend that to anyone who owned PSLV. Take the 30% and run(before Sprott does. I agree, if he’s smart he won’t collapse the premium all at once, but do it a little at a time in a rising market so that recent buyers of PSLV don’t feel screwed.

    Hans: the comments section for DoctoRX’ PSLV piece is hardly the place to argue about fractional reserve banking! :P

  • [...] DoctorX does a criticism of Sprotts PSLV (or rather those who invest in it). I have read such pieces before, and he does have a point. Why buy PSLV when you can buy the physical stuff? This is true until storage becomes a major issue. I still belong to the camp that thinks something marvellous may happen with silver investments, over time.  I’m also fairly sure that the PSLV premium of 30% over spot cannot last, but that may be easily solved by silver playing catchup. Also, should the much-talked-about-so-far-not-happening delivery failure happen at the Comex, well you can guess yourself. I don’t think a Comex failure will be allowed however. Especially not since commercials are soon net long. I just think the silver price will go up, because of the constantly growing investment demand in the US, China, Europe, everywhere. Advertisement GA_googleAddAttr("AdOpt", "1"); GA_googleAddAttr("Origin", "other"); GA_googleAddAttr("theme_bg", "ffffff"); GA_googleAddAttr("theme_text", "333333"); GA_googleAddAttr("theme_link", "0066cc"); GA_googleAddAttr("theme_border", "cccccc"); GA_googleAddAttr("theme_url", "ff4b33"); GA_googleAddAttr("LangId", "1"); GA_googleAddAttr("Tag", "media-monitor"); GA_googleAddAttr("Tag", "ron-paul"); GA_googleAddAttr("Tag", "the-blogs"); GA_googleAddAttr("Tag", "video"); GA_googleFillSlot("wpcom_sharethrough"); Tell your friends!FacebookMoreStumbleUponDiggEmailRedditTwitterLike this:LikeBe the first to like this post. This entry was posted in Media Monitor, Ron Paul, The Blogs, Video. Bookmark the permalink. ← HOT : China is going DOWN [...]

  • You make a very good point about the premium on PSLV. Like any closed end fund,PSLV can trade at a discount or premium to net asset value based on investor demand.
    Part of the reason for the large premium on PSLV is due to its tax advantaged status under which long term gains on PSLV are taxed at the 15% capital gain rate compared to the 28% rate for gains on physical silver which is considered by the IRS to be “collectibles”.

  • [...] Prices – Bloomberg Forecasts for gold still very positive for 2012 – Mineweb PSLV Bulls In Deep Space 9-9-9 – Daily Capitalist Gold loses sheen in Vietnam – Bullion Street Markets Vanish – [...]