13 July 2012

Sprott is short 1.8moz of silver

Interesting analysis by blogger Kid Dynamite on the latest Sprott PSLV offerring Eric Sprott Must Think Silver is Going Lower!

One point he makes is that there was 0.3920oz per share before the offerring but as Sprott did not buy all the silver, the silver backing the shares is now only 0.3738oz. So Sprott has to buy another 1,858,312oz to bring the ounces per share back up to 0.3920oz otherwise existing holders get screwed as they will have less silver per share than they had before the offerring (calc is number of shares 101,966,125 x 0.3920oz/share less ounces already in the trust of 38112409).

So Sprott is currently short 1.8 million ounces of silver, which is why Kid Dynamite says Sprott think the price is going lower.

The question this raises is what is Sprott's breakeven price above which he starts to lose money. This depends on how much cash he leaves in the fund. Say he keeps same % cash buffer as before. The calc is $889,768,892 / $898,311,957 = 99.05% or 0.95% of total net assets of the fund as cash. Therefore we take the cash the fund has now of $1,095,058,167 x 0.95% = $10,403,052. As the fund currently has $59,734,563 in cash as per Kid Dynamite's calculation, this means he has $49,331,511 to spend on buying silver (59,734,563 - 10,403,052).

So if we divide $49,331,511 by 1,858,312oz we get $26.54. However, he could hold a lower amount of cash. I'd guess the lowest reasonable cash balance would be $8m as this is less than he had prior to the offerring. In this case ($59,734,563 - $8,000,000) / 1,858,312oz = $27.84.

So if silver goes any higher than $27.84 Sprott loses money. If Sprott is as smart as many think he is then $27.84 or thereabouts represents an intermediate top for silver.

What makes this interesting is that while 1.8moz is not that much relative to the market volumes and would not usually move the market if executed properly, all the bullion market players know Sprott has to buy it. Will be interesting to watch the price Friday US time as I'd be surprised if Sprott would want to leave his 1.8moz short position open over the weekend as if there is some market moving news and gold/silver put on a big move, he is stuffed.


  1. Left this comment on http://forums.silverstackers.com/message-376346.html#p376346 re the Sprott short:

    As at this morning PSLV is still sitting on $59m cash and showing no ounces bought http://www.sprottphysicalsilver.com/NetAssetValue.aspx

    heyimderrick - I'm not saying he is manipulating the market or trying to force prices lower, but the thread heading is a fact, not an opinion. Sprott was given cash by investors subscribing to the new issue of units and he has not bought the silver, therefore he is short the silver price and underinvested in silver. He can use whatever limit orders he wants, that doesn't mean he will get the silver at those prices. If there is some huge political issue over the weekend (eg US bombs Iran) and when we open silver is up $5-$10 then PSLV holders get screwed.

    If Sprott had bought physical direct (from miners I assume you mean, which I doubt as they rarely hold physical silver in refined form) then that would have shown up in the NAV figures - why were the NAV figures update for all his purchases except this "physical direct"one?

    I think the Kid interpretation of the figures is highly likely to be true, which just says that Sprott has big balls to bet on the price, although discussing with some offline it seems Sprott himself would not wear any loss, it would just be the PSLV holders who get diluted. Question is, is that what PSLV holders signed up for when they bought PSLV? That Sprott could bet with $59.7m?

    Suppose the Perth Mint updated its pool allocated page http://www.perthmint.com.au/pool_alloca … sting.aspx and reported a total client Pool Allocated balance of 3,863,336.107oz but only 2,000,000oz of physical silver bars reserved against it and when asked we said "yeah clients gave us money to buy silver but we thought the price was too high so we didn't buy as we think the price will go lower". We would be getting hammered by the blogosphere I'd say.

    Consider also the ironic type nature of this, Sprott rails against the price being manipulated lower yet instead of continuing to buy the remaining 1.8moz of silver and pushing the price higher (to the net benefit of all PSLV holders) he pulls his purchase taking pressure off the market. 1.8moz is a lot of "buy silver, crash JPM" buying power. On the other hand you can see it as the BBs manipulating the market just to screw with Sprott so he doesn't want to give them the satisfaction so holds back, on the hope he will be able to buy more silver for PSLV holders.

    Two different takes. Was he right to stop buying or should he have continued to buy? Debate.

  2. Great analysis and comment. In regards to question whether Sprott is right or wrong to buy later I'm reminded that the "the distance between genius and insanity is measured by success."

  3. Ironic is right.

    If the PSLV holders were willing to sit on their position when it traded to a double-digit premium to NAV and back, they'll probably be willing to holding through anything, but it's hard not to see this as another instance of PSLV being a bait-and-switch: Promote yourself as some sort of superior alternative to "paper silver," and end up showing yourself to be more papery than SLV, /SI, etc., and a loser for anybody who paid much of a NAV premium.

    One assumes PSLV holders bought into the fund so that they could hold a fund backed by physical silver and not for Sprott to play the market with excessive cash reserves. That folks so suspicious of Powers That Be and the financial markets in general would, instead of just buying physical metal and burying it in the root cellar, rush into the arms of a closed-end fund run by a billionaire that fails to track the spot price of the metal ... it's an irony so straightforward it would make the hackiest Hollywood writer blush.

  4. Money junky gamblers of wall street.

    Will we ever return to an honest money system? Why is the price governed by these people? Will we ever say enough.

    Lets start a simple system.
    $1 per ounce of silver and $20 per ounce of gold, and the paper money can fly off into money heaven.

  5. Fixed ratios don't work.

    There must be a reference, and everything must float against it. Even gold changes in value.

    Even fiat currencies have their place, but not as the reference.