Jesse’s Cafe Americain: Will Sprott’s Next Physical Silver Trust Follow On Break the Bank?

This is why PSLV has such a higher premium per unit to Net Asset Value, SPrott cannot get his hands on any physical of size without blowing up the market. So, demand continues for physical and proxies for physical such as PSLV an shares are fixed, resulting in exploding premiums.

21 July 2011

Will Sprott’s Next Physical Silver Trust Follow On Break the Bank?

Surmise on my part, based on the facts at hand, but Mr. Sprott seems to have an interesting problem with his Physical Silver Trust.

Cash levels are extraordinarily low, down to about 2 million US dollars or so, which is not much cash on hand for a decent sized fund with a market cap of slightly over one billion US dollars. As a note, I have to extrapolate the cash on hand since Sprott does not release this figure, but they do put out the figures surrounding it. It could be as high as 4 million, which is still rather slim for a billion dollar fund, and a testimony perhaps to their belief in the silver bull.

But the question remains, with a premium to NAV of over 19%, with strong demand in silver and their units, how do they respond to this need for additional cash reserves and units?

The answer of course is a follow on offering, acquiring more silver and adding more units by selling it to the public. Now that they have digested their follow on gold offering of several hundreds of millions of dollars, perhaps they can turn to the silver market again.

But here is the catch. Funds like Sprott don’t do paper, to the extent that SLV and GLD do. They don’t do swaps with the Bank of England for virtual metal, because they are not ETFs but closed end funds.

And in this market, no responsible manager would agree to do a follow on unless they were able to secure potential bullion inventory at something approaching the market price, which today is around 39.60 per ounce, and have a reasonable plan to take delivery.

The current deliverable inventory at the Comex, the single largest depository of tradeable silver in North American, stands at 27 million ounces, with total value of just over on billion dollars.

Can Mr. Sprott obtain about 1/5 of the ‘visible float’ in silver bullion without buying against himself in the market, that is, raising the price he pays by the demand he presents, chasing his tail in the market?

He might turn to the LBMA, but despite their secretive inventories and 100:1 paper leverage, the problem remains the same. Doing a deal to satisfy demand in size is going to become increasingly difficult. A default occurs at the core, even while supply is available on the retail level, ‘at the margins.’ Until it is not.

Ah, the problems of the successful in time of paper delusions.

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