Is this Broadside About to Free Silver Again?

The Unlooked for Juggernaut
As many commentators point to very significant signs that the imbalance in silver’s supply and demand are reaching critical points, very few of them seem to be paying attention to a forgotten metric to watch in silver.  

It is that metric which may be about to broadside the silver market again and break it open for good:

 

570x400_Great Lakes Series


Submitted by The Wealth Watchman

The Long Sentiment Massacre

For over 40 months now, the banks responsible for manipulating precious metals prices, have kept a lid on silver.  Weird as it seems, it was all the way back in late April, 2011, when silver last touched nigh unto $50 per troy oz.

This artificial downtrend began with an assault on the paper silver market on a thinly-traded Sunday evening, as the bullion banks(JP Morgan, etc) crushed the price of silver roughly 15%, literally in minutes.
From then on, as many NYC investors on the long side of the trade woke up, they discovered their positions underwater, and covered them, which led to more pressure in the downward momentum in price.  Then, to pour Clorox on the proverbial fire, the CME raised margin requirements, not once, twice, or even three times….but five times within the space of roughly one trading week!

Facing the dual-losses of margin on falling price, coupled with the prospect of now being asked to fork over even more cash, in order to keep a hemorrhaging long silver position, most folks sold those positions and fled.  The effect was an excruciating 35% waterfall in paper futures in Comex silver within just one week, as price caved from $50 to $32.

Since that time, the banks have orchestrated roughly half a dozen very serious attacks on silver, and hundreds of smaller ones, keeping its price within a downtrend for nearly 3 and a half years. The intended effect, which has been theorized by others, has been to crush retail investor sentiment, causing them to refrain from buying silver, and helping to alleviate this shortage of available metal.  Many silver investors know that story all too well(having the battle scars to show for it), but these days, the evidence is starting to mount, that the engineered multi-year correction is looking to reverse.

As many commentators point to very significant signs that the imbalance in silver’s supply and demand are reaching critical points, very few of them seem to be paying attention to a forgotten metric to watch in silver.  It is that metric which I’m going to bring to mind today.

The Unlooked for Juggernaut

Since first launching in late October, 2010, Eric Sprott’s PSLV silver fund, has been an important presence in the silver market.  Its initial market offering raised almost $500 million dollars, and was responsible for taking over 20 million ounces of physical silver off the “just in time” silver supply line. 

I’ve always believed that this launch of Mr. Sprott’s closed-ended fund, was “the straw which broke the camel’s back”, and helped truly free paper silver prices at that time.  This led to the enormous spike from under $18 per troy oz., to almost $50 per troy oz., all within a period of about 9 months.

The reason I say this, is that we later discovered that all the stockpiles of remaining deliverable silver were truly(and rapidly) dwindling.  It took several months for that particular PSLV order of a mere 20 million oz., to be supplied to the vaults at the Royal Canadian Mint, which store PSLV silver for investors.  In fact, many of the bars, which arrived later, had markings indicating that those 1,000 oz. bars which were received, were cast on a date after the order for them had been placed.  

An “honest to goodness” silver shortage was becoming a reality, both on the wholesale and retail side.  Had that shortage gone unaddressed, and silver’s surging price not been “dealt with” by the bullion banks, the world would’ve witnessed a triple dollar silver price within a few more months, and the creeping silver shortage would’ve quickly become a silver “famine”. The bottlenecks in supply would’ve grown more extreme, and the parties lining up to acquire it in a panic would’ve grown into the industrial-user variety(think Apple Computer, or Microsoft).  The worsening situation in silver was dealt with, ruthlessly, however, by the Fed and its primary dealers, and today silver investors are simply waiting for real world fundamentals to finally mean something again.

570x400_Hawksbill Turtle

PSLV Features

Which brings us back to PSLV, which has certain characteristics that make it a bit unique among similar closed-ended funds, or ETFs.  One such characteristic, is that the mechanism for selling your units(shares), and taking delivery of physical metal is easier compared to other products, as the minimum threshold for doing so is lower than SLV or GLD.  Secondly, its selling point isn’t necessarily that it tracks the paper silver price, as SLV does.  In other words, if Comex silver says the spot price is $18 per oz., you won’t likely find the price of PSLV tracking it lower, as SLV does.

 

PSLV is an easy access point for big money positions to get into silver, as it now owns nearly 50 million oz. of it, representing one of the largest privately-owned stockpiles of silver on earth.   Oftentimes(but not always) when the silver price is taken artificially lower in extreme cases, a premium above spot develops on PSLV’s shares, and starts to trend higher. The reason this is true, is that PSLV’s owners are holding onto their shares, and are inclined to add to their position on silver weakness, not sell.  This ownership of “strong handed” investors, leads to a shortage in units available for sale for silver in great size, especially if silver metal is becoming harder to acquire on the open market.

The Premium

Which leads me to the indicator I’ve been watching for weeks: the PSLV premium.  A quick look at the interactive chart, provided by their website, demonstrates that the PSLV premium has been in a slow, but steady, uptrend since the beginning of 2014.

 

In fact, for the last several trading days, the premium in PSLV has closed above 4% each day. Think about the implications of this: the larger holders of PSLV would rather hold its units, than swap it for the instant premium, which they could exchange for other, more undervalued silver investments(like, say, mining shares, or even SLV).

The unwillingness to take that easy money off the table should be speaking volumes to silver investors right now.  Furthermore, it is becoming obvious that due to thechronic silver supply deficit that’s developing, that larger holders of PSLV are treating it as if it were metal in their hands, and not simply a trading vehicle to make a quick buck.

Historically, Mr. Sprott’s own timing in using PSLV’s premium as leverage to acquire more undervalued silver and gold assets, is impeccable.  To my knowledge, however, he hasn’t done this for quite awhile, nor has a new capital-raising offering been launched in quite some time.

Is that about to change?  Is Admiral Sprott(as he is fondly called by some), about to fire a giant broadside at the banks which have punished both him and his investors these past few years?

To be clear, I don’t have inside information on that topic, whatsoever. Nor do I think that a mere 4% premium would be considered high enough for them to make a decision of that magnitude.  I would however, urge more silver investors to be cognizant of this upward-creeping premium as a major indicator of both silver wholesale/retail tightness, as well as an early herald of any forthcoming investor offerings.  I guarantee you that the banks, which were caught off guard by Mr. Sprott before, are watching that premium like a hawk every day.

Remember, there was a silver deficit of over 113 million oz. last year alone, and that occurred at an average price of $23!  I seem to remember an interview with Rick Rule, an associate of Mr. Sprott, who assured precious metal investors earlier this year, that the “big money” was circling silver and gold like a shark, just waiting to pounce.  He even added a statement that a mere $2 billion could effectively “corner silver”, by making it nearly impossible for shorts to deliver the product.

Was he hinting at a new PSLV offering, when the time is right?  Possibly.  Either way, he’s correct: a tiny spec of the world’s available investment capital, rightly deployed, would instantly change things in silver and gold markets in a most tectonic way.  

Conclusion

JP Morgan and friends have surely had a successful looting spree these past few years in precious metals, but take heart, for they certainly aren’t unopposed.  These raiders would do well to be extremely cautious here, concerning any further take-downs in silver’s price.  It would also behoove us as investors, to be wary of this “Ironside”, this battleship, called PSLV, which still patrols these murky waters.  

Once the fog of war is lifted, and supply conditions are just right, a smartly placed broadside of, say, a mere $500 million dollars, would have fascinating effects on the “long con”, which many mistakenly dub “the silver market”.

-The Wealth Watchman

 

570x400_90percent