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Update: 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
Bron Suchecki
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