Thursday, January 26, 2012

Eric Sprott on the PSLV Secondary Offering

We love you and what you have done for precious metals optionality, but a high premium is not a good thing, Mr. Sprott.  You can fix that; please do so, sir.” – Gene Arensberg

HOUSTON -- In the linked audio interview below Sprott Asset Management’s Eric Sprott tells Eric King of King World News that the recent secondary offering for the Sprott Physical Silver Trust (PSLV, a closed end fund, not an ETF) reached $349 million, including the over-allotment green shoe granted to the underwriters.  Mr. Sprott confirmed they had already made buy commitments for the additional silver, but was uncertain when the metal would arrive. 

Unfortunately Mr. Sprott chose to focus his comments on the miniscule increase in the net asset value (NAV)  the new silver purchase adds to PSLV rather than addressing or apologizing for the destructive collapse in the overly high (up to 30%) premium the trust had risen to just ahead of the offering. Recall that we reported on that premium collapse for PSLV on January 22 (article at this link), highlighting the danger to closed end fund investors of buying shares of the securities when their premiums have been bid up to unreasonable and unjustifiable levels.

There can be no justification for anyone to pay as much as 30% over the spot price for any silver trading vehicle, no matter how good one thinks it is.  Very high premiums are the same thing as paying too much and high premiums mean one gets less action for their silver trading dollar.  The short-term chart below shows PSLV side by side with iShares Silver Trust (SLV, a continuous offering ETF which tracks in lock-step with the price of silver). The chart documents how Sprott’s PSLV first traded to a high premium and then how that overly high premium evaporated literally overnight.  Even though silver has advanced more than 10% since January 10, for example, as of today, January 26, a buyer of PSLV on January 10 would have a loser on his hands instead of a big winner.  What is “good” about that? 


(SLV and PSLV, 1-month, 60-min increments. If the image is too small click on it for a larger version.)


We happen to love the idea behind the Sprott Physical Silver Trust, but we loathe the idea that people get hurt by it when they unknowingly pay too much for a silver trading vehicle.  As we pointed out in the linked article above some PSLV holders were definitely harmed by the sudden evaporation of premium (from about 24% to about 9% on the day of the offering, clocking holders for about $1.30 per share). 

In the interview with Mr. King, instead of outlining a program of more frequent silver purchases or some other means of keeping a more reasonable premium in play for PSLV, Mr. Sprott actually said that he hopes the premium will “get back up to where we were.”  A premium is simply the amount over the per share net asset value of the silver held by the trust.  It ought to be called a "handicap" instead. 

If the premium for PSLV “gets back up to where we were” then in our own view it means that Sprott actually encourages higher premiums which guarantees that some future holders of the silver-backed paper trading vehicle are bound to get hurt again. Mr. Sprott’s curious reasoning that the PSLV premium had been driven up by “wise guy short sellers” leaves us scratching our head, wondering if we heard him right and wishing he had either not said that, or in the alternative, had explained why his silver fund is vulnerable to high premiums through wise guy short covering - the only way short sellers can drive up a premium.  We'd also like to hear why there is no real time mechanism to warn innocent buyers that the premium has reached untenable levels.

We wish Mr. Sprott would have advised his shareholders in the strongest of terms to be mindful of the premium BEFORE committing any capital to it.  We haven’t actually read the prospectus recently, but we have no doubt there are admonishments and warnings about that very thing in there somewhere, but most people will not actually read the overly long document before committing capital to it – out of trust and respect for Mr. Sprott’s deservedly sterling rep on the street.  Many of those very same people do listen to every word they can find spoken by Mr. Sprott and would act more carefully or responsibly if he showed leadership in regard to premiums in our humble opinion.  

We believe that Mr. Sprott’s instincts and statistics for silver and gold are spot on accurate.  We could not agree more with his views on the likely trajectory for the second most popular precious metal.  We have the highest respect for the Sprott Global and Sprott Asset Management family of companies, and do indeed believe beyond the slightest of doubt that every last ounce of silver the trust claims is exactly where it is supposed to be.  However, until and unless the Sprott folks find a mechanism to insure that the premium for PSLV is no longer allowed to reach injurious levels; until and unless our beloved Mr. Sprott adopts a public stance against high premiums for the funds his empire manages (instead of apparently encouraging them), we will have to practice strict avoidance of PSLV as a paper silver trading vehicle – except for those brief periods of time when the premium collapses once again to reasonable, non-dangerous levels. 

We urge Mr. Sprott to reconsider his apparent intention to foster hazardously high premiums and instead seek to educate potential PSLV buyers to first check what the premium is before buying, every time. Indeed, that is the kind of responsible leadership we have all come to expect from Mr. Sprott.  In short (no pun intended); We love you and what you have done for precious metals optionality, but a high premium is not a good thing, Mr. Sprott.  You can fix that; please do so, sir.    

To listen to the interview with Mr. Sprott, follow the link below.  Be sure to reflect on his views about the undervalued mining shares toward the end of the audio. 

Source:  King World News  

Disclosure:  The author holds no position in PSLV, long or short.  The author does hold a long position in SLV as previously disclosed as well as in leveraged securities, options and physical metal.       


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

Contact Us