Sprott Silver Trust (PSLV) Premium Collapse Costly
HOUSTON -- Just below is a good reason to pay attention to the premium over net asset value a metals trading vehicle is carrying BEFORE buying it. On January 16 when we issued our last full Got Gold Report, we warned in clear and unambiguous terms that the premium then extant for the Sprott Physical Silver Trust (NYSE:PSLV, more than 24% over net asset value then) “could evaporate at the drop of a hat.” Failure to pay attention to overly high premiums can be disappointing and costly.
We went further in that Subscriber update, saying: “If we held any PSLV at the moment we would immediately trade it for a vehicle with little or no premium. Or, we would buy an equivalent amount of physical metal and then cash in the bloated shares of Mr. Sprott’s vehicle.”
Anyone following the action in silver could have predicted that a new offering for PSLV was coming. Recall in our public offering on January 8, entitled, “Silver, You Ain’t Seen Nothin’ Yet,” we said then that: “Mr. Sprott can see and smell the same imbalance we are talking about and has moved into position for it in a very big way. Indeed, with his recent shelf offering, we think Mr. Sprott’s next very large purchase of silver metal is more or less imminent. Mr. Sprott can see the same chart we do.”
So on January 8 we gave our Subscribers a warning that a new offering for the PSLV trust was likely imminent, and on January 16 we strongly urged converting the then very high premium vehicle into something with less premium, either an ETF that tracks closely with and trades in lock-step with the underlying metal or in the alternative, physical metal, preferably the kind one takes delivery of and keeps close by.
Both warnings turned out to be prophetic, because on January 18, just two days following the full GGR, Sprott Physical Silver Trust announced – you guessed it – a 23-million unit follow-on offering priced at $13.20 per unit (then about $1.30 or 9% below the price PSLV was changing hands for). Ouch for the faithful PSLV buyers/holders and shame upon the managers of PSLV for allowing the premium to get so out of whack to the upside. The graph below captures the action well enough. It shows the instantaneous premium evaporation in PSLV.
(PSLV, one month, 30-min increments.) If any of the images are too small click on them for a larger version.
In the days just before that secondary offering announcement, people who correctly anticipated an advance in the price of silver, but decided to play it via the popular, but overpriced Sprott silver trading vehicle learned a ‘valuable’ but harsh lesson. They learned that very high premiums for commodity closed-end trusts are subject to disappear. In some cases instantly, as in overnight and therefore it pays to check what the premium is in advance of purchasing any paper silver trading vehicle. Especially closed end funds, in which there is little or no price arbitrage and premiums can become unreasonably high.
To illustrate just how much of a “lesson” one might have learned, consider the graph just below of iShares Silver Trust (NYSE:SLV) a continuous offering ETF that tracks in lock-step with the price of silver, less accumulated fees and expenses.
(SLV, one-month, 30-min increments.)
Now suppose two people had a notion that silver was set to increase in price on January 10 and one of those people decided to buy PSLV and the other one SLV. For argument’s sake, let’s presume that both buyers ended up catching the exact middle of the range on the 10th. The PSLV buyer paid $15.37 per share and the SLV buyer paid $29.17 per share.
How did they do up until Friday, January 20? Well, silver did indeed advance since the 10th, considerably so. Indeed silver closed in New York January 10 at $29.87 and at $32.03 Friday the 20th, a net gain of $2.16 close-to-close or a gain of about 7.2%. But because in the mean time the PSLV trust did a secondary offering, wiping out a big chunk of the overheated premium, our buyer of the closed end fund takes an unexpected (to him/her) hit. Sprott’s PSLV closed on Friday, January 20 at $13.90, DOWN $1.47 or 9.6% even though silver advanced in a big way since the 10th. As of Friday, SLV closed at $31.22 up $2.05 or up 7% from the 10th.
Both of our theoretical Silver trading vehicle buyers correctly bet that silver was about to move higher in price, but only one of them was rewarded for that correct assessment, the buyer of the continuous offering ETF. Had our theoretical PSLV buyer first checked to see what the premium was at the time, and upon finding that it was then IN EXCESS OF 24%, he/she might have then looked for a vehicle with a lot less premium before putting his/her money to work.
And if he/she had chosen one of the ETF products that track in lock step with silver, such as SLV or SIVR, our PSLV buyer would not be in the hole to the tune of nearly 10% even though silver has advanced more than 7%.
Moral of the story? Before buying any closed end fund, no matter how good one thinks it is, it pays to see what the premium is BEFORE making the trade. If investors have bid up a metals trading vehicle to an unreasonable premium, then it’s time to look elsewhere for a vehicle to trade.
As much as we are glad to see the new demand upon the physical silver market that the new purchase of physical metal by PSLV represents; and although we have the highest respect for Mr. Eric Sprott and the Sprott Asset Management Team, we can only hope that the PSLV management team takes a lesson themselves and doesn’t wait so long between new offerings, allowing the premium for their too-popular trading vehicle to get unconscionably high. And, given this sample illustration as a reinforcement, we hope our readers continue to carefully check the premium of any trading vehicle prior to hitting the green button, every time. It just might help to avoid a nasty, but unnecessary surprise some day.
That is all for now, but there is more to come.
