Tuesday, January 11, 2011

More Evidence Commercial Silver Supply Tight

More anecdotal evidence of the tightness in the commercial silver market surfaced yesterday in a piece picked up by our friends at the Gold Anti-Trust Action Committee (GATA), a press release issued by Sprott Asset Management on the delivery status of the roughly 22.3 million ounce (694-tonne) first buy for the new Sprott Physical Silver Trust (NYSE ARCA:PSLV).  The press release begins:    

“TORONTO, Jan. 10 /PRNewswire/ - 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 - News) ("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."  (Entire release at the GATA link above.)

We have to wonder if it is ordinary and normal for a 694-tonne order for physical silver to take two full months.  As of right now we can say that the physical bullion market was able to deliver to Sprott about 348 tonnes of silver per month.  

Just below is one of the silver charts we shared with Vultures in the full Got Gold Report (GGR) Sunday, January 9.  Note the front-running of the Sprott purchase contract by November 10.  More importantly note the action in silver since then.   

Continued… ***

A quick check of the PSLV website shows that the new physical silver trading vehicle is quite popular, because as of January 11 it is trading at a substantial 13%-plus premium to its NAV.  A 13% premium is way too high a premium for our own purposes and it suggests that the trust will be in the market for more silver sooner rather than later – we think.  

If it is tough for Eric Sprott to source less than 700 tonnes of silver, what will happen to the silver market if there is an even larger order for physical metal later on this month or this quarter?  

If there is a retrace in the silver price just ahead as the Sprott buying ends (and that is looking like a big “if” at the moment with silver back above $29), we can envision some world class dip buying into that dip from today’s fence sitters and profit takers.  We can also look for additional funds to add to their holdings, possibly at the same time that Sprott comes back to the physical market for more commercial bars of the second most popular precious metal.  

Come to think of it, we haven’t checked, but if Sprott contracted for all the physical silver at a price certain in November, then the price pressure is not from Sprott today but from their counterparties who likely hedged the order immediately to lock in their spreads.  If there was going to be a fall off AFTER Sprott was “filled,” it seems to us that it would have already occurred.  

The current tightness in the commercial physical silver market goes hand in hand with the continued strange action of the largest commercial futures traders and U.S. bullion banks “getting smaller” in their net short silver positioning, as we covered in detail in the GGR.  

Those of us who have already accumulated silver metal have to “like” the action and the near-term possibilities, but we also can stay at the ready to take advantage of any harsh weakness in the near future, if any. 

We believe that the tightness of commercial silver is very likely not a short term phenomenon. 

That is all for now, but there is more to come.  



The Original
Vulture Speculator

Trading gold, silver and mining shares since 1980 with a focus on taking advantage of volatility extremes, Gene Arensberg analyses the markets through a basket of technical and fundamental indicators and shares his findings from time to time here at Got Gold Report. Mr. Arensberg has been quoted in the Wall Street Journal, Dow Jones MarketWatch, USA Today and dozens of other news organizations.

"I've been a huge fan of Gene and his amazing work for years..."

Brien Lundin, CEO, Jefferson Financial, Host of the annual New Orleans Investment Conference and Publisher of Gold Newsletter

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