Sprott Physical Silver Trust’s Premium is Lower Than You Think

note: this post was written on the evening of 1/18/2012, for reference of the “todays” and “yesterdays” within…

There’s an old expression in poker: “don’t tap the glass.”  When people are doing stupid things, you don’t lecture them at the table and educate them – you don’t disturb the fish – you let them be fish and take their money.   This applies to trading too.   My former trading desk would occasionally get calls from brokers who were spouting nonsense, and I’d begin to explain something to them, but my boss would cut me off: “just hang up the phone – don’t tell them how to do it.”

Now, it should be clear to readers that I have not taken this approach with the silver market.  I have tried my hardest to re-educate all of those who are fed a constant diet of horseshit from pumpers all over the web – those who repeat the same nonsense on 20 different blogs as if repetition creates reality or fact.

Getting to the point:  PSLV, as a result of the secondary offering that they priced this morning, has a published NAV that is “wrong.”   The Sprott website is showing the premium (12%-13%)  based on the current trading price combined with the pre-offering Trust data.   (UPDATE: they’ve updated the data now – this is still a good exercise for the reader…) I’m not going to give you my exact numbers, because if you can’t build a spreadsheet and do this math yourself, you shouldn’t own $PSLV in the first place, but the gist of it is this:

1) The 1/17/2012 closing NAV for PSLV was $11.66

2) The offering was done at a price of $13.20, a premium of roughly 13%

3) There are fees that go to the underwriters, which we know from the underwriting agreement

4) Thus, we can estimate the net cash that the Trust will receive

5) The Trust has already locked in the price of the silver that it’s buying  – we don’t know the exact price, but we can use prices from the morning of 1/18/2012 (and/or the evening of 1/17/2012) to estimate

6) Thus, we can estimate the number of ounces of silver that the Trust will buy – keeping in mind that they will keep some cash on hand for expenses.

7) We know the pre-offering details of the Trust (ounces of silver held, cash held)

8 ) Thus we can calculate the post-offering estimates of the Trust holdings – ounces and cash

9) And derive the new estimated NAV from that.

Eric Sprott is the King of the Silver Market.   He is a master at work.   Some people think that I have a “hard-on” for Sprott – on the contrary – the way in which he has played the silver fanatics like a fiddle to line his own pockets should be a case study in marketing for profit.  What I do not tolerate is people drawing idiotic, blatantly false conclusions from data points like “PSLV is trading at a 30% premium to NAV, that must represent the real price of physical silver” – hint: it doesn’t.

So anyway, I think that Sprott might have pulled this off – succeeded in doing a secondary, crushing the premium in his fund, and STILL, somehow, not alienating the shareholders:   a short squeeze drives the premium from 13-17% up to 30-35%.  Then, when he prices the offering at a 13% premium to NAV, it seems “cheap” – a bargain!!!  Additionally, despite the fact that anyone who has any idea how financial markets work knew that Sprott was never going to do a $1.5 Billion lump sum secondary offering, the SilverMinions will read the $300 MM offering as “he had to do a smaller offering because he couldn’t get the silver to do a bigger one.”  That’s nonsense, but it doesn’t matter – they believe it.   He couldn’t find the INVESTORS to do a bigger one – that’s the truth, but hey – the truth doesn’t really matter in the silver market – I’ve come to that realization.

There’s another detail that the SilverMinions will somehow read as a positive:  Sprott’s own funds bought shares in the offering – hey – if Sprott bought shares, they must be a good deal, right?   How he gets away with this boggles my mind: he has investors who pay him to manage money.   At the same time that he goes out and buys silver for the PSLV Trust, he buys shares of the PSLV trust for his funds, effectively resulting in his Fund investors paying a premium for that same silver that the Trust just purchased, and adding another layer of fees on top.  It’s absurd.  He spent all year selling the PSLV shares that his funds owned at a huge premium and reinvesting in zero premium silver exposure (bullion, miners), and now he’ll try to do it again – only this time he’s starting with a 13% premium as a bogey.

So I bought $PSLV today, and shorted $SLV against it – a play that the premium will actually increase from here.  This is the kind of trade I hate, because the premium shouldn’t increase – it should decrease.   I should know better, because I understand what the “this is a buying opportunity because the premium is much lower than historical standards” crowd doesn’t.    As I explained it previously:

“The premium falls because, as more shares are issued, you need an increasingly large pool of investors willing to pay a premium.  The more shares you issue, the more investors willing to pay the premium you have to find.”

And you know what?  I think that Sprott’s marketing genius, and the miseducational power of the Silver Blog Mafia is a tremendously powerful force, and I think that they WILL be able to convince more people to pay the premium.   That won’t last forever – it’s a fools game – this “hot potato” game of “try to scalp PSLV’s premium and get out before the next offering comes and the potato burns your hand.”   But I’m rolling the dice right now.  If there’s one thing I’ve learned over the last year, it’s that no matter how many times you explain something, no matter how positively correct you are, no matter how logical or reality based you explanations are, it won’t matter.  The Silver Blog Mafia can mis-educate new investors much faster than the old ones get educated, so I’m going by another old axiom:

“If you can’t beat ’em, join ’em.”


long $PSLV vs short $SLV pairs trade.  I’m also long $SLV unrelated – net long silver.



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

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