What's the real premium for bulk silver purchases?

Strewth, cobber, the controversy surrounding premiums for bulk buys of silver continues to rumble on.

The basic premise was that the seriously wealthy would face huge premiums of up to 30% if they wanted to buy silver in large quantities. This figure is not as random as it might appear: it first started doing the rounds when Sprott's PSLV hit a premium of above 30% (peaking at 35% before his secondary offering on 18 January). In other words, such an extraordinary premium had to be justified in the silverogosphere by grounding it in fundamentals, viz. such an astonishing premium must imply a huge shortage in the silver supply.

This shoddy thinking reached its glorious nadir in Zero Hedge's abysmal pump of PSLV, as discussed here by Screwtape's Brian O'Flanogan; a number of commenters also waded in to patiently add to the debunking.

If that wasn't enough, Sprott's second issue caused the premium to collapse to 6%. This really should have been the death-knell for one of the most ludicrous of all the silver memes floating around on t'internet. I mean, if a premium of 35% implies a shortage, then presumably one of 6% implies a sudden glut in supply? Which would mean that Sprott's sudden large purchase of silver had somehow increased supply! It's enough to make one weep. This chart (courtesy of gotgoldreport.com) shows quite clearly just what a bad deal the holders of PSLV got in comparison with those of SLV:




But, one should never underestimate the resilience of silver religionistas memes. The facts never get in the way of a good bit of propaganda, even if all it takes is about five seconds' thinking to realise that the propaganda makes no sense at all. The great and the good of the silverogosphere continue to chant the new axiom that silver is unobtainable for less than a 30% premium when buying in bulk. The meme has legs, and all efforts to kill it at birth by the more rational parts of the community have failed.

I'm going to have one last go, before giving up. In recent private correspondence I was challenged to find ways of buying a million ounces of silver without incurring hefty premiums. So, I borrowed $34,000,000 from GM Jenkins (using the indentured slavery of my first born as security, as per his usual terms) and decided to do a bit of silver shopping. Here's what I found:

1. I could buy some silver futures contracts on the COMEX and stand for delivery. This way, I will get the silver at a spot price that I think will be a good price in the future (e.g. a few weeks ago, I could have easily picked up some futures for silver at $28 an ounce, which would have been a great deal; but even today, I could buy some futures at $34 an ounce quite cheaply). The costs associated with this will be the broker's contract fee and commission for the trade (a tiny fraction of a percent for such a large trade) and some storage or delivery costs once the contract is closed (again, this would be a tiny fraction of my $34 million order), plus some insurance. A bonus for conspiracy fans out there is that by doing this I'll be contributing to the collapse of the COMEX [/sarcasm].

2. I could buy and redeem SLV. Basically, this needs to be done in 'baskets' of 50,000 iShares. So my $34,000,000 will get me 1,031,553 iShares of SLV (before open of play on 29 January, silver is at $33.99 per ounce and SLV is at 32.96). So, let's say that I'll buy a round million iShares which will get me 20 baskets. The 'premium' will be what the iShares prospectus describes as 'applicable fees, taxes, expenses and charges'. One of these fees is $2000, which is neither here nor there if you're splashing out on $34 million of silver with GM's hard-earned cash. The rest adds up to just a few percent [if anyone can do this calculation more precisely, then I'll be grateful, and will add it to this post with an acknowledgement].

3. The Perth Mint is (at the time of publishing) selling silver 100-oz bars at 2.4% over spot (i.e. $34.65 as opposed to their last quoted silver spot price of $33.84 spot price) So, I'd need 10,000 of those. However, the Perth Mint Depository’s standard premium for 1000-oz bars is $0.20 per ounce over spot, which in practice would usually be stored in their vault. But for buyers of size (High Net Worth individuals), they will do “cash and carry” if requested and - for delivery to the USA by sea - an additional three to five cents over spot should cover freight. So purchase and delivery would come in at a rather tasty 0.74% premium. [Many thanks to Bron Suchecki of the Perth Mint for this information.] I'm sure every other major bullion seller around the world would also have similar fees and services for HNW clients and I wouldn't be surprised if there were some quantity discounts of list prices.

4. GoldMoney: If you don't trust the evil SLV, then perhaps you'll have more confidence in a White Knight in the form of James Turk. Here you can see GoldMoney's rates. Not surprisingly, the more you buy, the lower the rate. So a million dollars or more will get you a rather nice 'premium' of 1.99% for physical silver. And they'll deliver it to your house, if you like (although that will cost you a couple of percent extra).


I found about a million (well, half a dozen) other ways of getting my bulk purchase of silver for a low premium, but I don't want to labour the point...

So, to answer the exam question, 'what is the rate for bulk purchases of silver', it is between almost zero and 2%. That's quite a long way from 30%, I think you'll agree. Now, the die-hard cynics amongst you might say, 'well, that's all well and good in theory, but can you give an example of someone who has actually recently bought a large amount of silver without paying 30% premiums?'

Funny you should ask that. In fact, I know of a certain Mr E. Sprott of Toronto, Canada, who - according to the publicly available records of the PSLV Trust - has just bought 8 - 9 million ounces of silver (and rumour has it that he didn't even need to borrow the fiat off GM to do so...) I don't want to blatantly plagiarise someone else's work, so please check out Kid Dynamite's analysis, which shows quite clearly that Eric picked up his shiny stuff at very close to sp(r)ot(t) price.

Now this should come as no surprise. There are three incontestable facts about billionaires. The first is that they are very, very rich. The second is that they didn't get to be very, very rich by paying a 30% premium for something that they can get for almost no premium at all. And the third is that they tend to employ very smart, efficient people, who lose their jobs very quickly if they waste their employer's money.

So Sprott probably just got his people to buy his silver on the COMEX, at virtually no premium. Sprott cheerleaders on the silverogosphere then went around implying (again) that silver was in a shortage, and the premium-to-NAV proved this (even after it crashed).

It is, in fact, precisely this level of chutzpah which distinguishes filthy-rich billionaires from unpaid small-time bloggers whose eldest children are now condemned to spending the rest of their years darning GM Jenkin's socks...

22 comments:

anon said...

It would interesting to quantify how much of that premium came from short covering. I know several individuals that placed one-way bets on a premium "collapse" once it went over 20%.

Kid Dynamite said...

one quick clarification - I am certainly not implying that Sprott bought PSLV's silver on the COMEX. I think he could have if he wanted to, and I think the prices that he paid were in line with the COMEX prices at the time - but I don't think he bought COMEX futures.

-KD

Jeanne d'Arc said...

@KD,

Clarification of your clarification: I didn't mean to imply that you had implied Sprott bought on the COMEX. That was what I was implying (or saying, I suppose).

But you're right - we've no way of knowing for sure. But the one thing we can be certain of is that he didn't pay a 30% premium when he did it..!

Out of interest, what method do you think he took?

Kid Dynamite said...

the meme is that he negotiates directly with the miners/refiners for his silver. I don't know the answer, and his people (ie: investor relations) are incredibly un-helpful in shedding light as to where/how he gets it. I guess that's probably to perpetuate the myth that he has to keep it a secret because he's the only man in the world who has the ability to purchase physical silver at the sp(r)ot(t) price. ;-) and that if YOU want physical in bulk, YOU"LL have to pay an extra 20-30% premium!

Warren will be watching the bar list, of course, for any evidence of recycled silver.

I have a friend who was involved in the creation of the GLD as a product (driven by the World Gold COuncil, by the way, to HELP the price of gold, not suppress it. and it's done a tremendous job, obviously). He emailed me "WTF is this Eric Sprott doing? He should open up his fund for creations and have his vaults in London to facilitate the transfer of silver easily and efficiently"

I laughed in reply, and explained "you don't get it - he doesn't want fast and efficient, he wants meme-ology - he WANTS to be able to talk about how long it takes to get the silver. he WANTS to be able to talk about the premium of his fund and what it might mean, etc..."

Warren James said...

JdA, this is a great piece, a slam dunk on the question of premium. Another 'large bulk silver shop' is Bullion Management Group [link (barlist of which has been recently added to our feed). As you point out, one of the qualities of the silver-premium meme is it's non-provability to the common folk (who lack access to GM Jenkin's capital or likewise lack a firstborn to trade for it), but seems accessible enough to anyone who wants to enquire, simply posturing on the phone as a big buyer just to get a quote. If the premium on said binding quote is between 0-3%, then (as pointed out already) there is an excelent easy money arb trade available ... so long as you can find a buyer to flip the silver to, at the 30% premium (and at that point any honest and intelligent investor should begin to see the flaws inherent).

I'll certainly be watching Sprotts bar list reissue - expected in March.

KJ said...

this is another opportunity for those that believe in the premium = shortage and/or shortage story to shed factual light on the respective claims. I have not been convinced there is a shortage or that physical prices are anywhere near 30% but remain open to new information I may not be aware of.

Brian O'Flanagan said...

the only people that believe there is a 30% premium on bulk purchases are nutcases that probably still believe in the tooth fairy and Santa Claus.

Funny how we went from John Embry claiming that ebay was the true determinant of physical values, to ZeroHedge claiming that the PHYS premium was it, to now only "bulk" transactions occur at 30%.

Not to mention that one could easily acquire 1 million ounces from a bullion bank or on Comex at spot. Or they could buy 1,000,000 silver eagles directly through the US Mint at spot+$2.50 (brokered by an AP, of course).

So now these idiots think we are all stupid enough to believe that metals wholesalers now have to pay 30% above spot to acquire their inventory, only to turn around and sell it at spot+10% or so retail. Why aren't they all bankrupt already? Is Blythe giving them kickbacks?

These misinformation entrepreneurs are playing all there blind followers as fools. And they get violently angry at anybody who tries to tell them the truth.

Kid Dynamite said...

yes, Brian - and I offer to help anyone who wants to acquire bulk silver - I will get it for them 15% premium net to them - which should be a terrific deal compared to the 30% premium they claim is required.

KJ said...

i'm not sure why readers/followers of guru's/blogs do not demand an adequate response to the various claims...

i don't think the guru's/bloggers should get a free pass - and responding that "screwtape and KD don't know what they're talking about" isn't good enough nor is ignoring facts good enough...yet none/few challenge and demand a straight up answer.

I'll use Harvey as an example - premium high = shortage, closer to physical, slv fraud, etc. Premium low = punishing Sprott, temporary setback, will rise again, etc.

A few have called him out but Harvey reiterates the same pitch and does not waver.

Someone also needs to let Harvey know gld/slv physical quantities only change b/c of issuance/redemption...just b/c the paper price rises or falls $1 doesn't mean slv must buy or sell silver...

I recall Turd was pitching the 1M+ order results in 30%+ premium and he was getting wind of this via emails...and has he put out a correction? Has any of his readers challenged him on this?

it's ok to be a proponent of a website yet challenge the assertions of the host/writer.

And I don't mean to single out Harvey/Turd b/c it applies to Embry, Sprott, SGS, etc. They all do it and rarely, if ever, retract...

Arnsberg doesn't retract in the following article since he called the bs on pslv's premium but nonetheless, here's someone silverbugs follow who also called bs on the pslv premium:

http://www.gotgoldreport.com/2012/01/sprott-silver-trust-pslv-premium-collapse-costly.html

misinformation entrepreneurs or blind followers? likely both. But both groups should at least question the facts, be open to facts and if necessary, retract statements based on new information...and while the entrepreneurs have not shown much if any willingness to question the silver story, their followers should be willing to challenge them on various claims...

Robert LeRoy Parker said...

KD,

>driven by the World Gold COuncil, by the way, to HELP the price of gold, not suppress it.

Or driven to help the bullion banks remain solvent by providing physical flow into the london vaults which can easily be redeemed.

Brian O'Flanagan said...

the World Gold Council is controlled by mining companies, not bullion banks. Obviously, mining companies want higher gold prices, hence the WGC's efforts at promoting gold ownership. All forms, by the way. They promote coins, bars, futures, Bullion Vault - everything.

Kid Dynamite said...

RLP - by now I expect a man of your intelligence to understand that the creation of GLD and SLV have been massive drivers of the upward price momentum of gold and silver respectively.

KJ said...

rlp/kd, perhaps both thoughts are not mutually exclusive.

gld - massive driver

gld - legal safety valve for bullion banks who, if necessary, redeem shares and provide physical flow

KJ said...

rlp, i read your recent posts on fofoa, and it's something that's been on my mind since I started reading fofoa, and i've noticed when skimming through posts on screwtape that others questioned whether silver being pushed to take attention away from gold...

so assuming freegold takes place and physical gold is king of the castle, physical silver will not preserve purchasing power to nearly the same extent as physical gold. Physical gold for wealth, physical silver for spending.

And there's the whole gold needs to flow analysis and that, quite simply, more physical gold taken off the market into hiding = more pressure on the system as it needs gold to flow...ergo, rising price, more gold is coaxed back into the system...major price swings downwards, people get scared, stay out of the physical gold market, gold's a bubble, etc...

in any case, physical gold taken off the market stresses the system.

But Max Keiser would have you believe taking physical silver stresses the system and will bring down the bankers.

So if the objective was to minimize pressure on physical gold purchases that essentially will never be seen in this system again, two things come to mind, within the gold/silver realm:

a) pump the silver story, whether physical silver or paper silver
b) pump the miners, gold and/or silver

If things play out the way 'another' penned, then paper burns and mass disappointed for physical silver holders as they hold these 'assets' into the new system.

KJ said...

cont'd...

Now, a major part of the silver story is the naked short - that not only is supply limited but also the naked shorts must cover and this will cause price to skyrocket. According to one Professor, who history will likely be very kind to unlike many keynesian monetary scientists from the past or today, there's a boatload of silver that's been unaccounted for and that no one talks about and that such naked shorts are not naked at all but fully backed.

So physical gold = stress and physical silver = no stress on the system.

And with the silver story where its at today coupled with promises of much much higher prices, perhaps has been and will be a very effective method of diverting attention away from physical gold...

and add to that the dollars spent on gold and silver miners, which as the theory goes, paper will burn and shares for the most part will not provide much if any comfort on the other side of the fence, this is perhaps quite a bit of stress taken away from the physical gold market.

Robert LeRoy Parker said...

KD,

I agree with KJ that they are not mutually exclusive. The fact that they have been a large part of the increased pog fits well with Another's scenario. JR just posted a well laid out argument from costata in this regard here:

Link


Brian,

Clearly the WGC is not the only one involved with the ETFs. HSBC is the custodian in addition to being a bullion bank market maker. And I think Aristotle's comment applies here as well:

"If you've been capable enough to have established an empire, such as the bullion banks have, if you're truly worth your salt you will also see to it that your principal adversary/group in the public eye is really in your own pocket. You make sure they pursue meaningless things and generally looking radical or foolish compared to yourself so as to do no real harm to your empire, but also always to maintain them as just-credible-enough to keep them firmly established as the chief lightning rod for any agitations that might be directed against you."

KJ,

For Another's message to make sense there has to be a Saudi Arabia that has physically cornered the market. Because of this I'm bordering on obsessive with finding some sort of legit confirmation of the gold for oil trade. Just a lot of anecdotal stuff so far. Silver doesn't have the oil giant of the world on their side.

Robert LeRoy Parker said...

Sorry KD, bad link.

Good link

Bron said...

On the WGC & GLD issue, I know that in the early days of the WGC's creation of GLD and discussions on the structure, they were obsessed about the metal in GLD being allocated as they wanted "physical offtake", ie permanent removal of physical from the market as they wanted to drive the price higher. It was not a bullion bank driven concept.

This is not to say GLD is a great structure. As I say in http://goldchat.blogspot.com.au/2011/02/further-discussions-with-fofoa-on-gld.html

"Funny when you consider that the legal structure introduced, in my opinion, some holes that negated the “security” of the Allocated gold backing."

Further, as I note in http://goldchat.blogspot.com.au/2010/06/why-has-wgc-bought-into-bullionvault.html IAMGOLD Corporation, a shareholder in James Turk's GoldMoney, is also a WGC member.

Hmm, so IAMGOLD is supporting the honest GoldMoney, but also supporting the WGC and its fraudlent GLD product. Doesn't make any sense.

Robert LeRoy Parker said...

Hi Bron,

>physical offtake...to drive price higher

The gold market from the freegold perspective is so counterintuitive sometimes I have to question if I am in fact crazy.

I suppose physical offtake is accomplished, but it's as simple as an AP(bullion bank) redeeming a basket and moving it back to the lbma as needed. And if they really are on the verge of insolvency and want a rising price to supplement physical supply, the WGC basically gave them a huge boost in that direction. Additionally, the result of the increasing price drives investors towards other leveraged gold products rather than physical.

Could the BBs actually be driving the actions of the WGC without them even knowing it? Is that nuts? The BBs are also the creditors of the world, not to mention debtors. How far does the spiders web extend?

Bron said...

I don't think BBs were driving or influencing WGC in any way. WGC is an industry group of miners. Miners want a higher gold price. This happens if gold is taken off market and not returned (ie sold back).

In early phase of WGC's life the view was that physical offtake objective was achieved via jewellery so marketing efforts and dollars were directed this way. But gold price continued to decline.

A competing view formed in WGC that jewellery marketing efforts did not work and that Investment was the "swing" or marginal demand (Jewellery demand being consistent and relatively stable) factor that would increase prices.

There was a power shift in 2002 and change in Chairman and CEO of WGC when the "investment demand matters" people won, as indicated by the appointment of James E Burton (ex-CEO of California Public Employees Retirement System) as their new CEO - a financial markets guy - to drive the new investment marketing shift in strategy.

See http://goldchat.blogspot.com.au/2010/06/why-has-wgc-bought-into-bullionvault.html for more info.

People who lack this history of thw WGC and its politics therefore question it and the GLD product.

Kid Dynamite said...

KJ -
I think that the "naked" or "unbacked" COMEX shorts is just a distracting sideshow concept - because it's the LONGS who don't want to take delivery.

what you're really saying is that if everyone who was long a silver contract actually took delivery of it, then the price of silver would go higher.

yes - as they say in the movies: "no shit, sherlock" - I completely agree. But that's got nothing to do with manipulation, conspiracy theories, naked shorts, or anything else (not that I am accusing you of saying it does, I just think it's a common point of confusion/distraction).

if more people want to buy silver, then the price will go up. simple.

KJ said...

"what you're really saying is that if everyone who was long a silver contract actually took delivery of it, then the price of silver would go higher."


Thanks KD, pretty simple to understand when you cut through the bs. I must admit that I pretty much overlook that very point with all the 'distractions' although I am aware said 'distractions' are likely made up stories to fuel the mania.

And it obviously helps the mania when they pitch there's comex holders who can't get physical silver from comex for whatever made up reasons when really, most just don't want the metal.