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...