The premium on shares of PSLV, Sprott’s Physical Silver Trust, has remained under 5%, which is exceptionally negative sentiment for silver prices. Below, we have provided the current premium over NAV for the closing prices on PSLV (Real Time Chart) for Thursday, 4/19/2012, followed by a table reflecting the premium range and number of days at each level, since the fund’s inception.
|PSLV Closing Price:||$13.19|
|Ounces of Silver in Trust:||32,878,296|
|Trust’s Silver Value:||$1,044,707,863|
|Trust Net Asset Value:||$1,055,036,323|
|PSLV NAV per Unit:||$12.58|
Source: Sprott Physical Silver Trust
PMBull frequently cites the PSLV Premium when it is dipping lower for a reason. Historically, the premium investors paid for PSLV has been as high as 35% and as low as 2%. The premium highs have been achieved at market tops and the premium lows at market bottoms in silver. Here is a table showing the range of premiums and the number of days PSLV has traded at that premium, since fund inception:
The Premium on Sprott’s Fund as a Sentiment Indicator
When silver and precious metals are hot and the arguments for holding silver, especially physical silver, are validated by rising share prices, bullish sentiment begins to grow. At some point, bullish sentiment will reach extremes. The extremes occur on the heels of heightened fear in the markets and a greater level of distrust for paper Wall Street financial products in general. Investors who aren’t stacking silver bullion can look to Sprott’s fund: PSLV, which invests funds in fully allocated, unencumbered physical silver bullion.
As a closed end fund, the trusts units can trade at a premium or discount to the net asset value of the silver in the fund.
As bullish sentiment in silver continues to grow, investors begin to pay an increasingly higher premium over NAV. The NAV, combined with the premium, are reflected in the unit price. The premium rises as demand for the limited shares and silver bullion held by the fund rises faster than demand for silver or other silver funds that don’t present the same perceived value proposition. As the premium rises, PSLV begins to outperform funds like SLV and physical silver bullion.
Speculators and traders, aware of this dynamic, may also begin to buy, with expectations for the premium to rise even further. At some point, the rising premium can become a bubble. This bubble can deflate when silver prices drop, causing PSLV to under-perform silver. Further, when Sprott takes advantage of an excessive premium and offers new shares in PSLV, at a discount to the current share price, the premium can get whacked and PSLV can fall, independent of silver prices.
This is exactly what happened on January 18th of this year:
Today, the premium is below 5%. As interest in silver wains, the premium on PSLV can fall, which it has. Like any financial asset, bullish optimism or bearish pessimism can reach extremes, and these extremes are reflected in the premiums on PSLV. A sub-5% premium may be viewed as extreme pessimism for PSLV’s prospects. ETF or ETN premiums or discounts are an excellent contrarian sentiment indicator because so few investors understand premiums or discounts on a funds NAV. That, or they simply choose to ignore them when caught up in an emotional trade. When premiums reach the upper ends of a range, the shares are rich in price. Likewise, when the premium is low, or even at a discount, pessimism is at an extreme and the share price may be presenting a high level of value.
Using the PSLV Premium to One’s Advantage
Sprott’s PSLV fund, and the inherent fluctuating premium attached to the shares, can allow one to more strategically time purchases of the fund, or silver itself. The premium is a data point that can be used as a sentiment indicator. If one buys when the premium is low on the expectation that a rise in silver prices is imminent and one is right, the premium itself can grow, along with the NAV in the fund, providing an incremental boost to returns.
By the same token, a low premium, may provide some downside protection, should silver prices slump. To be sure, PSLV shares could theoretically trade at a discount to NAV, but you will note in the table above that this has not occurred. A discount is unlikely because arbitragers could buy up shares in PSLV and then redeem them for the higher valued physical silver, a feature of Sprott’s fund.
Why Do Investors Pay a Premium for Sprott’s PSLV Fund?
When investors are bullish on silver, they tend to bid up silver prices, but will also bid up PSLV beyond the value of the silver the trust holds. Silver investors are willing to pay more for the added security of fully allocated physical silver that backs shares in the fund. Rumors continue to persist that iShares’ Silver fund, SLV, may hold only paper promises for silver, which other parties may also lay claim.
One only need recall the debacle with MF Global where thousands of customers had claims to gold that went missing during the firm’s bankruptcy to understand why investors like the concept of fully allocated silver bullion bars, numbered, published and secured in a vault. PLSV, while not the actual physical metal, sitll provides a theoretically higher level of security over paper claims for silver. Hard core precious metal investors will always tell you that if you can’t hold it, you don’t own it. The Sprott fund, while not true physical silver, stacked in a vault in your home, is as close as you can get to it in a paper silver fund.