Surmise on my part, based on the facts at hand, but Mr. Sprott seems to have an interesting problem with his Physical Silver Trust. And that problem is indicative of a physical bullion market that is riddled with leverage and irredeemable paper, reminiscent of the Collateralized Debt Obligation and Credit Default Swaps markets, before their virtual default and meltdown.
Cash levels in his fund are rather 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 PSLV 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, and a testimony perhaps to their belief in the silver bull and low operating expenses.
But the question remains, with a premium to NAV of over 19%, and 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, a secondary offering, acquiring more silver and adding more units, and selling them into the public demand.
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 a listed company's equity might do. They just print more shares.
Even supposed bullion offerings like SLV and GLD do paper chases almost every week. They do swaps for for virtual metal, for example, throwing IOUs on the pile that may or may not be good in a demand crunch for bullion, because they are tracking ETFs, and not closed end funds. They have to manage inventory to the fluctuations in almost real time.
What you see with PSLV and PHYS, and funds like them, is presumably what you get, and in these days of what appears to be a shell game in the silver market, that type of product commands a substantial premium if one has some chance of taking possession in something approaching a reasonable manner.
And in this market structure, no responsible fund manager would agree to do a follow on unless they were able to secure potential bullion inventory in advance at something approaching the market price, which today is around 39.60 per ounce, and have a reasonable plan to take delivery in the foreseeable future. I hear that their last purchase took THREE MONTHS for delivery. Three months or more is a significant period of time in today's volatile global markets. Three months puts us in the historically stormy seas of October, well beyond the known horizon these days.
The current deliverable inventory at the Comex, the single largest depository of tradeable, traceable silver in North American, stands around 27 million ounces, with total value of just over one billion dollars. Not much in today's world of billions flying about, even through individual accounts.
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 prices he pays by the demand he himself presents, chasing his tail in the market as it were?
He might turn to the LBMA, the storied London Metals Exchange which is the locus of bullion trade. But with their secretive inventories that change hands in daily multiples of themselves, and purported 100:1 paper leverage, the problem remains the same. When you pull actual bullion out of that system, you start raising leverage, and risk, geometrically.
Alas, the central banks do not have stores of silver which they can strategically sell into the market to satisfy demand and help their cronies in the bullion banks as they do with gold.
Doing a deal to satisfy demand in size is going to become increasingly difficult in such an imbalanced, poorly regulated market. A default tends to occurs at the core of the market, even while supply is available on the retail level, 'at the margins.' Until it is not.
In other words, you will probably be able to buy a few coins locally the day before the wholesalers default on their obligations, there is a run on supply, and nothing is available as deliverable inventory is quickly pulled off the market, except at the most usurious prices. And of course the governments intervene to save, and probably somewhat selectively, the naked shorts from ruin.
Ah, the problems of the successful entrepreneur in times of collapsing paper and its associated delusions.
