Why Won’t Sprott Buy More Silver For PSLV and crash COMEX?

Update 25 July: I contacted Sprott Asset Management and they clarified that they could do a PSLV secondary at any time however the time lag for SEC clearance (possibly up to 45 days) of a new prospectus would allow traders to frontrun the placement. Once the one year public period has passed they would be able to do an overnight deal in which case there would be no frontrunning. Sprott Asset Management reiterated that they would not do a deal that would have a material impact on PSLV’s premium.

Update 20 July: I've been informed that Sprott can't do a shelf offering until his fund is one year old, which it won't be for many months yet and that Sprott said at the Vancouver Resource Conference that he would not do anything to hurt the resulting premium in the fund. That answers the question in my post title. I've left the rest of the post below as is. I'd still suggest that he consider structuring additional offerings in a way that would put some pressure on the market. Buying silver via forwards may not be best way to do it.

Kid Dynamite has come out all guns blazing in his latest post. His post goes into detail into a point I raised in my last post - why isn't Sprott doing secondary share issues for his silver fund?

He has a point. By not issuing more shares in the face of demand, all that happens is investors are paying $120 for $100 worth of silver. This means $20 worth of silver is NOT being bought and taken off the market, which takes pressure off the bullion banks.

The response that if he did a secondary that it would reduce the premium, hurting the existing investors, is valid. But the point is he shouldn't have allowed that situation to develop in the first place. [see update below] Now he is caught. By not wanting to hurt existing investors he is diverting silver demand AWAY from taking physical off the market INTO just bidding up the premium.

In any case, I would counter the "reduce premium" argument by suggesting that Sprott could do the secondary in a way as to probably cause no loss to existing holders. Consider that PSLV has 22.3 million ounces. A 20% premium suggests there is at least demand for 4.46 million ounces (20% of 22.3moz). I think most would agree, however, that he could do a secondary for double that given the profile and trustworthyness of his fund.

COMEX has registered stocks of 26.8moz. Consider if Sprott slowly bought 8.92moz of silver futures and then stood for delivery. That is ONE THIRD of the entire COMEX stock. What do you think that would do to the price of silver when Sprott and others assert that the physical market is currently so tight? Those that believe this would have to expect that you'd get a price increase that would easily cover any decrease in PSLV's premium.

And the argument that Sprott shouldn't do it because COMEX would cash settle does not hold water. Even if the cash settlement price is below the current "real" physical price, it would still probably be above his purchase price (as silver is in a bull market). In any case, if his actions were able to cause such a significant and high profile failure to deliver, then the resulting price move really would be "explosive", producing a profit on his existing silver holdings that would cover any loss (if any) on the cash settlement of his futures contracts, and benefitting existing PSLV holders to boot.

It is a win win: if COMEX delivers they take a huge hit to their stocks, if they don't, the price gets a huge hit to the upside. Personally I don't think it would play out this way. Bullion banks would source silver to deliver into the Sprott contract and thus maintain COMEX stocks. But that is just a theory. Until someone with the capability to make such a move does it, it is all talk, both on my side and theirs.

Turnover and Fractional Memes

I recently listened to an interview between Eric Sprott and Chris Martenson. Eric has a very good line in spin playing to the themes beloved by the 'bugs. Deconstructing them requires more time than I have at the moment, but this comment I can't leave:

"... I think all the paper markets are a joke. As you are probably aware, we trade a billion ounces of silver a day. A billion ounces. The world produces 900 million a year."

There are many falsehoods in the precious metal commentary "market" but I'm surprised Eric is supporting the idea that large turnover figures are suspicious, which I debunked in this post. He should be careful supporting this meme as it can just as easily apply to his own funds, particularly his silver fund as he seems not interested in doing any secondaries (in contrast to his gold fund).

The suspicious turnover meme is often confused with fractional bullion banking, an example being this comment by The Burning Platform:

“Several competent analysts have worked the numbers (including Bill Murphy and Chris Powell of GATA), and have come to the conclusion that for every ounce of silver in known inventories there are approximately 100 paper contracts trading (a fractional bullion system, if you will) on various exchanges across the globe.”

My response below:

1) My understanding is that the 100:1 figure did not come from “analysis” but from a statement made by CPM Group’s Mr Christian. See here. I would be very interested in independent analysis coming to the 100:1 figure that did not rely on Mr Christian’s comment, please provide links.

2) Mr Christian’s comments were confused by many as a statement about the ratio of fractional bullion banking instead of paper to physical trading ratio, which are two completely different things. GATA’s Adrian Douglas did an analysis that concluded the fractional ratio was 4:1. That analysis had serious flaws in my opinion (see here but in the end it was too conservative, with Mr Christian confirming it is generally 10:1 (40:1 in the case of AIG).

Pan Asian Gold Exchange Hype

The new Pan Asian Gold Exchange (PAGE) has got Andrew Maguire into hyper mode claiming that it "will ultimately destroy the remaining short positions in both gold and silver" and "in very short order affect current precious metals price discovery dynamics." This all based on his wishful thinking that "if just 1% of their [Agricultural Bank of China] customers bought a single 10 ounce contract, that would equate to 1,000 tons of physical gold being drawn down."

As Kid Dynamite comments in a FT Alphaville article on Maguire "a 10 ounce contract is worth well more than the average annual income in China, right? There was a stat recently that 40% of Americans couldn't come up with $2k if they needed it for emergency bills... I wonder what % of Chinese can afford to buy 10 ounces worth of gold?" I tend to agree. While it is always positive to have more ways people can buy gold, if you think that "this new gold and silver exchange has flown under the radar" of the big short players like Andrew does, then you are severely underestimating them, at your cost.

It reminds me of the hype that circulated some time back about the new vault in Hong Kong (by the way, what happened to all that metal was that clients were supposedly going to pull out of London and move to Asia, bringing down the LBMA?) Anyway, the impression (meme?) given by that story and the spin on PAGE is that there are few exchanges/markets around the world apart from the "fake" COMEX and London. Certainly, the story is that there are few places where "real" prices for physical metal can be found. In respect of that, you may find this list of gold markets from Sharelynx a useful reality check:

US- New York Open Outcry; Electronic Trading CME
UK- London LBMA
China - Shanghai SGE; SHFE
Hong Kong CGSE; HKEX; HKMEX
India - Mumbai NCDEX; MCX; NMCE
Indonesia - Jakarta JFX; ICDX
Japan - Tokyo TOCOM
Pakistan - Islamabad NCEL
Turkey - Istanbul IGE
United Arab Emirates - Dubai DGCX
Europe EUREX
Nepal - Kathmandu MEX
Russia - Moscow RTS
Singapore SICOM
South Africa - Johannesburg JSE
Taiwan - Taipei TAIFEX
Thailand - Bangkok TFEX
Brazil BMF

Between these, the 25+ ETFs that Sharelynx also tracks daily, and retail bullion dealers, I'd say it isn't too difficult for investors to buy gold these days. China certainly hasn't had access to these methods of buying gold to-date, but by the amount of physical metal we've seen being shipped into China over the past few years, I don't think Chinese investors (savers, more like) have had any problems getting all the gold they need.

Government v Industry

The two charts below from Andy Smith's (Bache Commodities) latest piece are a humorous use of US house prices to illustrate the problem of Big Government. The first shows the real boom is in Government jobs and lobbying. The second how gold buyers aren't fooled by America's shift from productive to unproductive jobs.

PMs and the LME Warehouse Scam

Gata and ZeroHedge have picked up on this Wall Street Journal article on bankster owned warehouses restricting deliveries out to the minimum amount allowed by the LME. The scam is summarised by the Financial Times: buyers "must keep on paying rent on the metal even after you have asked for it to be delivered, giving warehouse companies a guaranteed income stream".

But with no restrictions on how quickly metal can come in (and the bankster warehouses have been bidding for metal to be delivered into their warehouses from producers) it "has had the effect of driving the cost of metal in the physical market in the US to the highest level in more than a decade relative to LME prices". The FT notes however that this creates the risk that "the LME contract risks becoming entirely detached from the physical market."

Apart from the storage fee scam, an increasing price is good for the banksters because it makes it easier to sell commodities as an alternative investment class to institutional investors (see FT on Goldman Sachs).

Problem is, with lots of metal coming in but restrictions on it going out and you end up with increasing stockpiles. That doesn't help the story that commodity prices will rise. Solution: take the metal "off warrant" which, as FT Alphaville points out, just transfers it into a "non-LME storage facilities or simply being classified private non-LME registered stock in the very same warehouses. Kept out of sight, so to speak."

The scam here is that (FT Alphaville again) "the industry still reads cancelled warrants as an indicator of physical demand" which is positive for prices, however "many of the 'cancelled' warrants are ... not transforming into real deliveries, they’re just being stacked elsewhere in the same warehouse. In which case the demand they insinuate is potentially not real at all."

Precious metals are not subject to the warehouse outward restrictions scam and the spot market is much bigger than futures anyway, from a physical point of view. However, the "off warrant" scam can be played, particularly on fools like ZeroHedge who get all excited about COMEX eligible and registered trends while ignoring (ignorant of?) the "stock" sitting in ETFs and, more importantly, the dark pool that is bullion bank vaults. And don't fall for the "its fractional" false flag. Yeah unallocated is fractional, but what is missed is that if the amount of fractional is giga-enormous, then even at 10:1 or even AIGish 40:1, the amount of physical metal being held in the system is still enormous.

Which is why I am very interested in this ETF bar list project and am doing what I can to help, as this I believe holds the potential to reveal just how big that dark pool of stock really is.

Lies leave traces behind

A quote from the latest Mike Krieger article: "For the grossly impudent lie always leaves traces behind it, even after it has been nailed down, a fact which is known to all expert liars in this world and to all who conspire together in the art of lying."

This quote appeals to me because I see this happening often in the internet precious metals community. I see many untruths starting out and propagating and even if they are "nailed down" they still leave a feeling of distrust. I am of course speaking of the Perth Mint here, but there are many other beliefs about the precious metal markets that behave like this. These untruths also resurface again and again, thanks to precious metal newbies who fall upon old webpages, which gives them life all over again.

These untruths fall into two categories: a) Lies, which I classify as those put out by people knowing them to be false; and b) Misunderstandings or Misinterpretations, which are put out by well-meaning people unknowledgeable in the subtleties of the precious metals markets. Why these untruths appeal and resist refutation is best explained by the following text, which prefaced the quote above:

"... in the big lie there is always a certain force of credibility ... and thus in the primitive simplicity of their minds they more readily fall victims to the big lie than the small lie ... It would never come into their heads to fabricate colossal untruths, and they would not believe that others could have the impudence to distort the truth so infamously. Even though the facts which prove this to be so may be brought clearly to their minds, they will still doubt and waver and will continue to think that there may be some other explanation."

I should point out that the quotes are not Mike Krieger's. Mike was merely quoting from Adolf Hitler's Mein Kampf.

(Trying) to buy gold in Chile

A lot of stuff SovereignMan writes is good, but this latest piece on buying gold in Chile is a spin job. Simon Black says that Chile is "where the government just leaves you alone", with "a fairly well-developed gold market". See if that is justified with these key points from the article:

"major banks or the Central Bank, with the great disadvantage of having to pay value added tax" - most countries do not charge VAT on investment bullion

money exchange houses ... the way they sell is informal, which means that they are not required to charge the value added tax ... premiums on gold coins in these shops from as little as 1% over spot" - doesn't say what quality coins you get for 1% and I question whether the 1% really is 1% once the buy/sell spread on the spot is taken into consideration (money changers aren't known for tight spreads)

"some private bullion coin dealers which deal in foreign issuances like the Canadian Maple leaf coin for around 3% to 6% over spot. These dealers do not necessarily have a place of business with fixed office hours – they’re private traders who will often meet at your home or office" - sounds a bit dodgy and I'd certainly not be interested in having a dealer know where I live or work

"storage, the best of option in Chile is at the banks. This can be difficult for foreigners as it is typically required to have some sort of residency visa to have a safety deposit box or checking account" - bank safety deposit boxes are no good in a bank holiday

"no private secure storage facilities in Chile other than the secure vaults around the country’s many casinos" - that isn't a sign of a well developed market

"possible to bring in larger quantities of gold, tax-free, but there is a slightly more complicated process. One must first convert all gold holdings to coins issued by a country with which Chile has a free trade agreement ... a lawyer must obtain a ruling letter that the coins were made in that country (Canada, in this example) and are thus not subject to import duties" - what a silly requirement and process

That doesn't sound like a country that wants people to own gold.

Corporate fascist economic system

A Fistful Of Dollars:

Without Federal Reserve intervention in the financial markets since September 2008, the biggest banks in the world would have entered bankruptcy liquidation. The U.S. economy would have experienced a 10% to 20% fall in GDP. The unemployment rate would have soared above 15%. The stock market would have fallen 70%. Wealthy bondholders and stockholders would have seen their wealth cut in half. Incumbent politicians would have all been thrown out of office. The richest Americans, constituting the ruling class, would have borne the brunt of the pain.

In a true capitalist system, organizations and people who assumed too much risk and made poor decisions would have failed. But the United States does not have a capitalist system. We have a corporate fascist economic system where a small cartel of bankers, military weapons suppliers, and mega-corporations set the agenda for the country through their complete capture of politicians and the mainstream corporate media.

The Global Economy’s Corporate Crime Wave:

Corporate corruption is out of control for two main reasons. First, big companies are now multinational, while governments remain national. Big companies are so financially powerful that governments are afraid to take them on.

Second, companies are the major funders of political campaigns in places like the US, while politicians themselves are often part owners, or at least the silent beneficiaries of corporate profits. Roughly one-half of US Congressmen are millionaires, and many have close ties to companies even before they arrive in Congress.

As a result, politicians often look the other way when corporate behavior crosses the line. Even if governments try to enforce the law, companies have armies of lawyers to run circles around them. The result is a culture of impunity, based on the well-proven expectation that corporate crime pays.

Tungsten Bar Scam

I'm suspicious of tungsten gold bar stories. This story on fake bars in Vietnam confirms my suspicion.

It say that reports of fake bars caused a 50% drop in gold turnover, which reduced fiat inflation as it reduced the use of, and holding of, gold as money. As the story notes, previously "government agencies had to apply a lot of measures to stabilize the market. The State Bank of Vietnam had strenuously resisted with the criticism from the public when it was compiling the government decree [ie restrictions] on bullion gold trade."

Convenient. Remember this play book when you start to see stories about fake bars coinciding with high inflation/mass interest in precious metals.

SPAM comments

It seems blogger have been automatically classifying some comments as Spam and not publishing them. Apologies, I haven't been checking the spam comments folder for legit comments.