Mr Eric Sprott likes to talk about how long it took him to get the first lot of silver for PSLV. Three months he said, which supposedly tells you how tight the physical market really is. His delivery is top notch – after all he’s a successful fund manager. But let’s take a closer look at his actual silver delivery. What I hope to demonstrate here is that rather than being sensational, his story is actually quite boring.
So as a second part of our series to encourage us all to question more closely the claims of those who promote silver as an investment, we turn to one of the most oft-repeated silver memes on the net: “Sprott had trouble sourcing silver because of how long it took to get his physical delivered”. And before anyone accuses me of being anti-silver, please read my recent ‘Silver Bulls’ post [link] where I basically speculate that the price of silver is about to smash all records. What I really want to do is question the dogma where people lap up the story (including me) and interpret it as being indicative of a tight physical silver market.
The PSLV bar list [pdf] says 22,298,542.936 fine ounces of silver. In round figures [calculator], this is 632 tonnes (or 632,153 kilograms).
Taking delivery of that much material is not the same as taking a delivery from Pizza Hut. Anyone who has taken delivery of a monster box (which you guys have in America) has would have an idea of how heavy physical silver can be. Anyway, shipping that much weight is a logistical challenge, so let’s explore. But let’s ignore insurance paperwork and shipping ports, customs, etc., since I still don’t know where Sprott bought his silver from, although it stands to reason that some of it must have come from overseas. I DO have knowledge about the weight limits for a shipping container, and it’s really easy information to find if you want to check for yourself [search].
A 20-foot shipping container can hold approximately 20 tonnes maximum. This is both a structural limitation as well as a road-transport maximum (the road tonnage limit varies from country to country). A 40-foot container is double the size but similar restrictions apply – i.e. not necessarily double the weight – my research shows one 30-tonne limit for a 40-foot container.
Using our average, if Sprott had to get his stuff to the Royal Canadian Mint for storage – he would have needed approximately 31 shipping containers to do it. Here is the visualization (using 20-foot containers) of what that looks like, and my digital people have loaded the first one onto the truck already, thirty to go!
Then there’s the forklifting involved. In my research I found a picture of the vault of the ZKB Silver ETF, which shows an example of silver stacking which should make us all envious. This isn’t an article about ZKB, I just wanted to show a photo of what silver bars typically look like when they are stacked on a pallet (e.g. for transport).
What you’ll see above in this picture roughly confirms my research:
“a 1000oz silver bar is approx 12cm x 9cm x 33cm (width x height x length) and they pack 1t per pallet in two layers of 2 bars wide by 8 bars deep = 32 bars, so excluding the height of the pallet, 1t would take up approx 96cm x 18cm x 66cm.”
Let’s say we have 1 tonne per pallet in rough figures, that means that Eric’s delivery required lifting and shifting approximately 632 of these babies – and requires pack and unpack. Here is another visualization of what that looks like (click for large version). The bulk of these are stacked 5 pallets high (each stack weighs 5 tonnes), except for the row at the end (32). Please note this is a visualization only - it is not likely that the silver was ever in a big pile until it was all stacked inside the vault (still on pallets inside?)
And the same view, different angle (click for larger versions of image)
From the above picture, it's pretty clear that this is one heck of a lot of silver to shift. No really – think about it … even if the refinery were just across the road from the Royal Canadian Mint, it would still be a huge job just based on the forklifting effort. Then add shipping times, road haulage, different suppliers, customs clearance, security, whatever else. Stepping back and looking at the practicalities of getting 632 tonnes of silver from multiple sources to Canada, the only thing I now find surprising about the fact that it took Sprott three months to get his silver is that he was able to do so quickly!
So even disregarding the stories of still-warm-metal-bars … if there are any experienced logistics managers out there, please let me know your opinion of whether taking 12 weeks to ship and pack these is about right or way off. Please anyone let me know if my mathematics is wrong, I'll happily adjust the figures or (and publicly amend my statements) if I’m proven wrong with my calculations.
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Updated 17th August 2011 - thanks for all the opinion and feedback from everyone. I received a comment from Bron Suchecki by email, am adding the content to the bottom of this post because the blogger comments system seems to be malfunctioning at the minute. Bron introduces a rather excellent twist to the plot - the possibility that Sprott himself got diddled by whomever he bought the silver from - and to that extent Eric fully believes the 'shortage' association by virtue of his PSLV purchase experiences:
Bron said .."Having trouble posting this comment to your post, could you put it up for me:--------------------
Precious metal vaults are not like distribution warehouses with space for 20 trucks to load up a one time. Most would have one dock or two.
And yes it isn't just unload, thanks mate, see you later. You are checking off each bar against the supplier's bar list.
So even if the metal was across the road it would take some time.
As to the purchase, I think what Victor and Kid guess is probably how it was done. You would certainly buy in smaller lots over a few days so no one in the market knows you are a large buyer. My guess is he bought it loco USA, not London.
However, it did not need to be done as forwards. Each lot could have been done as spot unallocated and on t+2 requesting immediate conversion to allocated (held in London). Then you take 3 months to get it shipped from London to Canada. This means you have no counterparty risk as it is off balance sheet allocated and all at the cost of about 3 cents per ounce for shipment.
Contrast to the forwards, where if the counterparty fails, you now have price exposure. Yes you still have your cash, but have issued shares at a price based on the forward deals which you now have to scramble to buy at current spot prices. If Sprott did forwards, then as Victor says he was backing PSLV with "paper" temporarily and exposing PSLV holders to counterparty exposure to bullion banks.
There are a few possible reasons why it was done this way:
1. Kid's reasons - it allows Sprott to talk about the 3 months delivery time and let the bugs misinterpret that.
2. He relied on his bullion bank counterparts to structure the deal and got played. They would have recommended forwards as they can make more margin on the forward points and it takes pressure off their physical books as they just sub contract with refineries to deliver over 3 months ex-US as and when the refinery has the physical.
The best thing Sprott could do for the silver bugs would be to open a London metals account with a bullion bank. Buy silver in lots from different counterparties, with settlement to his London account. When all done call up the bullion bank and ask for a 600t allocation - shouldn't be a problem as SLV has done numbers like that on a number of days. That way he finds out if the daily huge movements in SLV are real. My guess is he'll never do it this way because they will deliver it. Then he has no story to tell.
Alternatively, Sprott's organisation is just not that cluey on the PM markets and just take their banker's advice. With the size Sprott is dealing in, he could just contact refineries directly and cut the bankers out. Better still, just do a deal with a miner to buy the next 600t of their output. Thinking creatively there are many ways to structure this and minimise or eliminate exposure to banks."
Updated 29th April 2012 - Over at the Chris Martenson blog there has been some great discussion about the bullion markets, with contributions from Eric Townsend, Bron Suchecki, Victor the Cleaner and Jeff Christian. It's quality stuff and worth a read (just the comments section) in it's entirety. However relevant to my own research, I spotted this quote from Jeff, which basically vidicates Bron's theory in the paragraph above. For the comment itself, one must take Mr Christian at his word but it's so beautiful it made my eyes water. This is just one paragraph of a larger comment about silver:
"... Regarding Sprott: They got hosed. We spoke with Sprott people about their delivery problems, as well as with bankers. They handled it dreadfully, and did not require the banks to behave in standard market operating procedures. Why, we don’t know, but they did everything wrong the way many rank amateurs do. Sprott is an eminent salesman, however: He turned lemons to lemonade, saying not that he was an amateur in buying all that silver, over-paid, and was messed over in delivery. Instead, he said it was because there was a problem getting the physical silver. There was no problem with the silver; he just did not negotiate and handle the bank properly. No surprise there to anyone who has watched his funds over the years. ..."
My comments on this are: (1) Bron's interpretation appears to be correct :). (2) Sprott, however resourceful and clever, still presented a deceitful story about what occurred. If this were about a delayed BRIE delivery then I suppose it's fine but it's not - common people are searching for ways to protect their wealth from financial armageddon and many good people have been hoodwinked by Sprotts story. Perhaps at the time they bought an overpriced PSLV which later had its premium collapse. A transfer of wealth from your pocket to someone else's courtesy of hype and spin. Or as Kid Dynamite would say, 'sold to you, Sucka'.
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Addition 30th April 2012 - Kid Dynamite in the comments section added a good point, which is worth highlighting in the main article body.
"Warren - I just want to re-emphasize the point that Sprott's counterparty: ie, whomever was responsible for delivering PSLV's silver to PSLV - did NOT default on their side of the trade. this is important, as an uncareful reading of JC's explanation could conclude "just as we thought - the banks didn't give him what they owed him" which is false... "And just remember, the primary issue is here is not whether Sprott is a great marketer (he is) or whether buying silver is good (it can be), or any kind of character judgment (irrelevant). My focus is purely that the story about the delivery taking a long time because of silver shortages, as popularly portrayed during the initial PSLV offering, is false. And consequently, whether newbie investors were influenced into a particular investment because of a false portrayal. And that it's okay to explore the human element of being duped and feeling poorly about it. Bear in mind that the PSLV 'delayed delivery' story was one of the underpinning 'shortage of silver' proofs.
Be sure to read the rest of the Martenson comments thread, which is still ongoing.
