Metals musings, 1/8/2012

First, I figure I'll share my thoughts on BOF's heat-generating PSLV post below. In fact, I think the more heat put on Sprott, the better, because it's unconscionable that for all of his interviews, no-one has ever asked him any tough questions, like those Kid Dynamite has painstakingly brought up. For example: "Why did you quietly unload all your shares of PSLV if you believe the premium is rational," or "If the market is so tight, why didn't you just procure your silver from SLV, since you don't contest the enormous SLV inventory in your presentations," or "What is the difference between the PSLV premium now and the PHYS premium of 2010, which fell from 20% as soon as you issued a secondary?" Perhaps there are good answers to these, but I'm not aware of them.

That said, I personally wouldn't push the anti-PSLV argument too far. As I recounted here at the time, I dumped a large position of PSLV last spring when the premium went well over 20%, so I'm not unsympathetic to the idea that there are irrational forces at work. But the important question shouldn't be whether stupidity is a component of the PSLV price (stupidity is a component of lots of prices), but rather how much of the PSLV premium is stupidity; or phrased differently, what would a fair premium be? Sure, 30% seems outrageous, but is 15% (i.e. where it was a few weeks ago?).

A friend once only half-jokingly told me he saw no point in buying more physical gold than he could store in his ass. Without having to think about the physical logistics of this proposition too carefully, the concept does bring to light a certain (ahem) painful difference between silver and gold. Put simply, there are very, very few people I know who would feel comfortable even considering buying silver in large bulk to keep in their homes (or on their persons); and finding a secured vault or safety deposit box to hold several hundred thousand dollars worth of silver bars is a nontrivial matter. (Aren't nickels currently worth something like 10% more than their face value? How many people can take advantage of that in size?) I won't even go into the liquidity problems (both real and perceived) that make holding large quantities of metal a non-starter for many (especially for us Westerners immersed in paper like fish in water), nor will I get into things like tax advantages and pension/IRA provisions except to say that though I know little about them, they surely contribute to making direct comparisons between the PSLV premium and bullion premia a little problematic.

Simply put, right now, I think a lot of long/intermediate term buy-and hold type investors and institutions are catching on that $28 silver has significantly more upside than downside, and are seeking ways to capitalize on upcoming silver mania in a way that doesn't involve renting brinks vaults and security details. (Obviously if silver is back at $50 by 2013, even if the PSLV premium is back down below its average of ~15%, and premiums on coins don't go up at all, there will still be a lot of happy PSLV investors.) Personally, if I had to, I'd choose CEF, with it's tiny premium to NAV (though no redemption mechanism). I'm fine with SLV and DBS and AGQ for trading, but I couldn't with a good conscience recommend SLV for a long-term investor. I know there's really no hard evidence of malfeasance behind it, so I won't try to convince anyone of my position, but after recent events, let me just say I feel justified to go with my gut. I'm talking about events like Madoff getting away with his Ponzi for decades despite being monitored by the SEC (couldn't they just have asked for evidence of, you know, actual trades?), or MF Global customers' money somehow ending up in JP Morgan (maybe they'll give it back?), or the fact that the CFTC has been "investigating" what Bart Chilton has called a criminally manipulated silver market for what, 3 years now, with no substantive update whatsoever (so why not just end the investigation already? What about the lawsuits that weren't summarily dismissed as incoherent paranoid accusations should be?) At this point, nothing would surprise me. not even if all of the SLV silver bars were made of cheese.

Anyway, I thought I'd do my metals update on the plane back from Philadelphia, but alas it's almost time to turn off electronic devices (or to pretend to do so). So a few quick charts that I'll probably have to post after markets open when I get home.

I'd be surprised if this is a good week, because both metals fizzled after a good opening, with gold being stymied by its 200 day MA. FWIW I had joined a "two week trial membership" to GATA's "Le Metropole Cafe" to see what it was all about. A contributor there, James McShirley, mentioned some complicated "Cartel" signs he saw early in the week which led him to all but guarantee gold wouldn't make it over it's 200 day MA this week, and that Friday would be a down day; while in a similar vein, Ed Steer of GATA/Casey Research wrote: "As has been the case for many years, there's always a spike up in gold and silver the moment the job numbers are released...followed by the usual smack-down within half an hour or so. Let's see if that holds true again today." Their confidence inspired me to buy some ZSL Friday morning (I use those leveraged ETF's only for very quick day trades). If nothing else, I kind of looked forward to hammering them here for talking shit with such confidence, but they turned out to be dead on. Let's see how they do this week.

So, while I expect a down week, I'll be watching the weekly gold chart for a weekly close above $1575.

As for silver, the 34-week MA should cross the 55-week MA this week (bullish). I'd like to see a weekly close no lower than ~$27.50 to keep the potential flag/falling wedge alive.

Similarly, on this daily chart, i'd like to see the bottom of the black rising channel function as support (vs. a drop to the bottom of the falling blue channel below it, which would mean the several month downtrend is still very much alive). Success there would augur an eventual test of the green dotted line (and ideally the tops of the blue then black channels) before too long.


Brian O'Flanagan said...

Indeed there are numerous advantages to ETFs and closed-end fund silver investments. In addition to the ease of acquisition, storage and security there are also tax advantages like you said, better liquidity, lower trading costs (lower bid/ask spread), the ability to trade on margin if needed and to acquire in an IRA.

However, there are disadvantages. SLV, PSLV and the others are all financial assets held in the world financial system. Your shares can be borrowed, lent, hypothecated and rehypothecated without your knowledge. And like KD pointed out, PSLV has the right to suspend redemptions. In a SHTF scenario it is highly unlikely that you will be able to convert and get your silver.

So whether the advantages outweigh the disadvantages is up to the individual I suppose. Regarding SLV, the arbitrage mechanism ensures that a material premium to NAV is practically impossible, so the advantages and disadvantages are irrelevant. But for PSLV there is no arbitrage. So sure, a premium for PSLV can be rational in my view. 30% - no, but something under 10% would be a fair representation of the relative advantages of the vehicle.

GM Jenkins said...

Yes, good points all. If Sprott regularly issued more shares, the premium would probably be <10% and I agree that <10% could be a "fair representation of the relative advantages." Good points also on how it's essentially a paper trade, so though it appears the silver community is getting pissed at e.g. KD for bringing this stuff up, Sprott is actually working against their interetss by fooling people that a paper trade is something more (e.g. he could easily take more actual silver "off the market" with a secondary but he's sleazily pretending that his promise not to "damage" the premium is somehow good for the the silver price, etc.). Light is the best disinfectant, as the saying goes. Still, as sleazy as Sprott seems, he does have a reputation to uphold so it woudl appear his reputation is also a component of the PSLV premium. I bought a large position of PHYS for my mother and feel ok about it. She doesn't want gold lying around her house and unfortunately has brain freeze whenever I try to explain goldmoney or bullion vault or whatever.

GM Jenkins said...

I just realized I had posted an incomplete version of chart #3, so I've replaced with the later version. I have to stop charting while drunk.

Kid Dynamite said...

"Sprott is actually working against their interets by fooling people that a paper trade is something more "

yes, GM - very much so, which is another one of the "you can't make this up" ironies of PSLV... that was kinda my point in this earlier piece, which I think you read:

what's most incredible is that the silverbugs are so brainwashed that they DEFEND Sprott's non-buying of silver with BULLSH!T excuses like "he can't get the silver even if he wants to" and "he doesn't want to bust the COMEX," etc...

Nickelsaver said...

Where did you guys get the name for your blog, from C.S Lewis?

Nickelsaver said...


Anonymous said...

Totally off topic - apologies - but I had to share this. I've just registered with the SGS site (for purely journalistic reasons, you have to understand...).

First, it looks like I'm banned from commenting before I've even made a comment (which is perhaps not too surprising, but hardly in the spirit of things. SGS: if you're reading this, you're still very much allowed to comment here whenever you like. Free speech and all that...)

Second, when you register, the following rubric comes up:

"You agree, through your use of this forum, that you will not post any material which is false, defamatory, inaccurate, abusive, vulgar, hateful, harassing, obscene, profane, sexually oriented, threatening, invasive of a person's privacy, adult material, or otherwise in violation of any International or United States Federal law. You also agree not to post any copyrighted material unless you own the copyright or you have written consent from the owner of the copyrighted material. Spam, flooding, advertisements, chain letters, pyramid schemes, and solicitations are also forbidden on this forum."

I almost wet myself.

GM Jenkins said...

Wow, did you see this:

SGS (in response to someone directing him here):
"Yeah. These morons [i.e. us], especially kid dynamite are part of a paid JP group to discredit us."

That's just sad - he asserts it as if he has some secret evidence he's drawing from and not a *single* commenter has the balls to question him any further (lol at "especially Kid Dynamite" ... no commenter even clears up for him that KD has his own blog and just comments here)

I remember his site a year ago used to be a lot of fun (I actually first ran into Warren there), but now going there now, it's become a watering hole for anti-semites with double digit IQ's. Just makes me embarrassed to be a fan of physical silver. Frankly, I'm beginning to suspect he's some agent or double agent of some interest or another, his whole enterprise is just too weird.

Warren James said...

Getting paid for this would be nice. It's a good idea actually - I might write to JPM and see if they would be willing to sponsor us. So far they didn't seem to be intimidated by my SLV database, if extortion doesn't work then perhaps holding out our hand might. But then we'd have to change the site disclaimer.

Promisians in the roof - little buggers you can't get to them and they chew all the damn wires. SGS, we're just getting warmed up, got some good stuff for you this year ;)

KJ said...


there was a shift after the september gold/silver plunge and after MFG went down. If i have the scorecard right, it would show:

TFMetals - Turd recommends going pretty much all physical gold/silver although did do some trading with whatever $'s were returned from MFG.

SGS - recommends 85% physical. Tinka shares with the other 15%?!

silverdoctor - I believe he only recommends physical and puts up a mix of gold/silver stuff on his site.

if/when prices start rising, might start to see them backing off the physical talk and focus more on trades/miners. But do think their readers lose site of the fact they're mostly in possession.

oh yes, there's Sprott et al as well - system is collapsing, hyperinflation, 100:1 ratio of claims to physical, manipulation, markets are broken - but don't worry, buy my paper products that are based on the paper price and yes, buy some physical as well.

Might be overreaching and if so, will wait to be humbled :)