Saturday, 21 January 2012

Explaining Today's Silver Surge

A few days ago, Eric Sprott decided to take advantage of the record premium over NAV of his physical silver fund PSLV (or for some other arbitrary reason) and to issue a $300MM follow-on offering, whose proceeds would be used to buy up silver to add to PSLV's existing physical holdings. Naturally, as soon as the news broke, the premium dropped to about 10%, making PSLV holders unhappy. This is not the first time that Sprott has done this: as a reminder after his April 2011 follow on offering in PHYS, we were fully expecting a comparable physical sequestration to occur via PSLV, to wit: "It appears to have already had an impact on silver, which jumped by $20 cents to another 31 year high on the news, as the market now likely expects a follow on offering in PSLV as well imminently." About 10 months later, it finally happened. As was to be expected, any short-term gains focused investors obviously became angry that by collapsing the premium, which we speculated was shortage driven, they have suffered a hit to their P&L (expressed in dollars of course, which as a reminder to the holders, should be largely irrelevant, especially to those who believe a PM-based barter system is imminent). Yet they forget the flip side to the equation: the money taken out of the premium, would be promptly used to take silver out of (hyper hypothecated) circulation, in other words, in the closed system, the drop in Premium would translate in a rising price in the underlying. Which according to UBS is precisely what has happened, and why silver moved as much as it did.Quoting from FMX Connect: "Today’s incredible move was the culmination of a comment made by UBS analyst Edel Tully. He stated that hedge fund manager Eric Sprott may be in the market buying spot futures in a private letter to his clients." And even as the premium dropped, the price of spot silver increased by over 5%, on the speculation of silver being taken out of the market and delivered to Sprott.

- Read the full article on Zerohedge here:

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