Paper and Physical Silver Prices Are Not Decoupling Yet

• Posted by kid dynamite
• on January 19th, 2012

The good news for silver noobs just starting to get interested in the precious metals and educating themselves (yes, I use that term loosely) online is that there are easy ways to tell which sources have an idea what they are talking about, and which sources are just spouting the same crap that they heard others spout, joining in the groupthink, and living in the land where anyone who doubts that silver is going to $200/ oz in short order is a bankster shill cartel manipulator.   You just have to know what to look for.

One such example of this nonsense is the claim that “paper prices and physical prices are decoupling.”   They’re not.  They haven’t been decoupling, we’ve covered this before, and they’re still not.  I just wanted to write another post on this because with the Sprott Physical Silver Trust secondary offering, we have another concrete example of the NON-divergence of “physical” and “paper” prices.

So let’s completely ignore the fact that Eric Sprott himself told you “we can buy silver, basically, at spot,”  after all, that was last year – maybe things have changed?  No – let’s go to the math.  Remember yesterday’s post when I explained how you can approximate the new NAV of PSLV before it was posted on the website?  Well, now that the website has updated data, we can do even better – we can calculate the price per ounce $PSLV paid for its silver.

Let’s look at the before and after (the secondary offering, that is) snapshots of the Trust.  Before:

After

 

Now,  don’t be intimidated – this is simple spreadsheet math.  If you can’t do this math, you shouldn’t own $PSLV.

1) We know how many ounces of silver the trust held before the offering

2) We know how many ounces of silver the trust held after the offering

3) thus, we know how many ounces of silver the trust bought

4) We know the number of shares sold in the offering, and the price per share net to the Trust (net of underwriting fees)

5) So we know how much cash the Trust received

6) We know how much cash the Trust had before, and we know how much cash the Trust has now, so we know how much cash the trust spent on silver

7) cash spent on silver / ounces of silver bought = price paid per ounce of silver.

Voila.

My numbers come to $30.44, which, it should come as no surprise, is right in the range where silver was trading yesterday:

 

 

When a precious metals blog tells you that the prices of physical and paper silver are diverging, you can immediately have a pretty excellent clue that they don’t know what they are talking about on the subject.  Here’s an example, from everyone’s favorite:

 

 

“We wish the best of luck to anyone who wishes to buy 10MM or more in physical silver without incurring 20%+ premiums on the order when all costs are factored.”  Nope – the original post at ZeroHedge was an abomination of misnformation, and this defense (from another ZH comment thread, after someone pointed out the Screwtape Files post) is still wrong.  Trying to defend nonsense by making up more nonsense doesn’t make it any less nonsensical.     Silver gets cheaper in bulk purchases – not more expensive – you can even see this on the retail level – sites offer better prices if you buy more coins.   Of course, Sprott bought $300 MM of silver yesterday without incurring a 20% premium – he must be really “lucky!” (/sarcasm)

For a thorough debunking of the recent Zero Hedge post that tried to put forth PSLV’s then-huge premium to NAV as the “real” price of physical silver, see this post at Screwtape files, and my comments therein on the thread.

As regular readers know, I disclosed in the prior post that I’m currently LONG $PSLV and short $SLV against it.  I must be crazy to continue to debunk the same misinformation that would help my trading position, but hey – that’s how I roll.

related:

Jan 18th: PSLV’s Premium to NAV is Lower Than You Think

Jan 17th: PSLV Announces Secondary Offering

Nov 22nd: PSLV will not go out and buy $1.5 B in silver imminently

Nov 16th: Sprott Physical Silver Trust Files Shelf

Oct 12th: Sprott Sells 1MM PSLV

Sep 30th: Sprott sells 1.5MM PSLV – The last of the hedge fund shares

Sep 19th: Sprott sells 1.754MM PSLV

Sep 12th: Sprott sells 1.827MM PSLV

Aug 26th: Sprott sells 1.6MM PSLV

Aug 11th: Sprott sells 565k PSLV

Aug 2nd: Sprott sells 700k PSLV

July 23rd: Sprott sells 1MM+ PSLV

July 14th: Sprott sells 700k+ PSLV

April 28th: Sprott sells 1.6MM PSLV

March 12th: Sprott files to sell his PSLV shares

March 8th: “Misinterpreting PSLV’s Premium to NAV”

July 18th: “Ask Eric Sprott Why He Won’t Buy More Silver for PSLV”

-KD

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