07 January 2015

Using Sprott's PM funds to get physical at spot

Another month, another redemption from Sprott's PHYS gold fund, 29,761oz. SPPP also had 2,424oz of platinum and 5,539oz of palladium withdrawn. As indicated last month in this post, this activity is arbitrage driven and only occurs in these funds, and not PSLV, because they trade at a discount to their net asset value (due to a lack of investor interest).

Jesse is the only other blogger I know covering Sprott's funds and he has a different explanation, that it is due to "the mispricing of gold bullion and the tightness and leverage behind the scenes in the physical gold market". I disagree with him because as the chart below shows, the redemptions in PHYS don't occur when their is no arbitrage profit to be had (that is, when PHYS trades at a premium, see here for an explanation of the chart).

I find it hard to believe that the bullion market's tightness just happens to correspond with PHYS premium/discount patterns. Also, they are only taking out a tonne of gold once a month, which would hardly help at all.

I think it is worth pointing out that the redeemability option for Sprott's funds make them a better investment than totally closed funds like the Central Fund of Canada, as the capability for NAV discount arbitrage means that there is a cap on how big the discount will get. Compare that to the minus 10% discounts the Central Funds are currently at.

Jesse also notes that PSLV's "cash levels have fallen below one million. There is going to be a secondary offering to bulk up those cash levels some time this year." Whether this occurs will depend entirely on PSLV's premium getting to staying to around 5% in my opinion. In this post I got a confirmation from Sprott "that they would not do a deal that would have a material impact on PSLV’s premium." On the chart below I've pointed out where two secondaries occurred in the past on PSLV's NAV chart.

You can see that a secondary results in a hit of 3-4% to the premium. With the premium currently sitting around 1% Sprott isn't going to do a secondary as that would push PSLV into a discount: certainly a "material impact". You may then ask what happens if the cash goes negative, surely they have to raise more cash. Correct, but they can do that by just selling metal from the fund, just like GLD and SLV do to pay their fees, instead of by raising money from issuing more units. The chart below shows the historical cash balance of the three Sprott funds.

You'll note that SPPP went negative in March 20014 and it wasn't until late April that the fund's cash was topped up - by a liquidation of 600oz of platinum and 1400oz of palladium. Given SPPP is currently negative to NAV and negative cash, another liquidation will occur shortly.

At current burn rates PSLV's cash will go zero mid-February. Based on SPPP behaviour, Sprott should be willing to fund the fund for a month or so but if the premium doesn't get up to 5% then I'd forecast around end of March they'll sell silver from the fund to top up the cash.

So we have a situation where Sprott funds are unlikely to get too big a discount, nor a premium above 5%. This does create an opportunity for the patient investor will a bullish view to buy physical at spot. Just buy Sprott's funds when their share price dips below NAV and then wait when they get to a premium and sell them and use the proceeds to buy coins/bars. PSLV has presented that opportunity three times in the past two years. The strategy is more problematic with PHYS, which seems stuck in negative - you'll probably have to wait for gold prices to recover and thus investor money to flow back into PHYS bidding up its shares relative to NAV. The risk is that will also correspond to a stronger market for coins/bars so premium may also rise, but I don't think they will initially rise too much beyond what you should be able to get out of PHYS when investors get bullish on gold again.


  1. Bron, a few things:

    1) ignore what the people at Sprott say about "that they would not do a deal that would have a material impact on PSLV’s premium". that's already been proven false. Eric himself was saying that years ago when PSLV was at a 20% premium. It's not a promise he can make, as he has no control over what a secondary will do to the premium.

    2) there is a clause in the PSLV/PHYS prospectuses that LEGALLY prevents them from doing a dilutive secondary offering - one in which the NET proceeds to the trust are less than NAV. Since Sprott pays his bankers 4% to place the secondary offerings, this means that his trusts cannot LEGALLY do a secondary offering unless they can sell shares at a 4% premium to NAV, which would result in the trust getting net asset value for the new shares.

    Maybe Jesse will read this and finally stop perpetuating falsehoods about more stuff he has no idea about.

    1. Jesse used to be a raving USD hyper-inflationist. I think he's dialed that down a bit lately ..

    2. Thanks for the detail, so I'm right about the 5% for the wrong reason. In that case I'd say with the physical strategy if the premium gets to 4% then prudent to sell out rather than trying to get more, as there will be no indication by Sprott when they will do a secondary.

      One might want to ride the premium if the trading volume has been weak, as the decision to do a secondary is not totally based on the fund's premium getting above 4% but also a judgement as to whether there is enough demand in the market to absorb the secondary volume, so weak trading volumes may mean that Sprott holds off on a secondary even with a 5%+ premium.

    3. Man you hold a grudge... been bitchin' about Sprott for at least three years now.

      They provide a great and convenient vehicle for metals investment outside of the metal itself, and are supported as such by many of the most influential names in the business.

      Then it was The Docs...

      Then Harvey Organ...

      And now Jesse...

      You're either a paid troll or simply in need of a little (actually a lot) mental health care.

  2. As predicted, SPPP sold 390oz pt and 900oz pd to raise $1.2m on January 12. Did this after cash went to negative $284,933, previous cash top up was at negative cash balance of $291,728, so seems Sprott only willing to fund up to $300k.

    On current projections, PSLV will go negative mid March 2015 and negative cash balance of $300k on 7 April.

  3. For the record, Jesse has been a non-raving stagflation believer for at least ten years or more. And the 'flation in the stagflation is just ordinary inflation. I have considered John Williams case for hyperinflation and found it not probable.

    As I recall my hypothesis about the Sprott redemptions in PHYS was tied to the general phenomenon of significant declines in almost all the Western gold ETF bullion levels, but very little in silver.

    When I say that Sprott will have to do a secondary offering, I am really saying that as their cash levels get this low they will have to 'do something.' How can I make that claim? Because I do not follow PHYS as a product, I follow its premium relative to other premiums in PSLV, CEF and GTU.

    When PSLV has to do a secondary, or whatever they must do to raise cash presumably, it affects the premium in an unusual way. And so I have an eye out for them. I cannot speak to what EXACTLY PSLV will do to raise more cash. In the past they did a secondary. Perhaps the premium precludes that and they must do something else. The point is, they must do something and it will likely affect the premium.

    This is the extent of my interest in it.

    In general, it would not be bad to actually understand what someone is saying within its context, and not take select items out of that context. But I will give Bron Suchecki credit to say that he just does not make things up and then attack them, as some internet trolls tend to do rather frequently.

    And he does not seem to be a hypocrite either. And that is a very nice quality to see in an analyst these days.