Sprott Silver at it Again

Sprott Silver is at it again. They announced that they will make another offering to buy physical silver. Luckily, the premium on silver is only 4% at this time, so we can't fall much further in premium.

http://sprottphysicalsilvertrust.mediaroom.com/index.php?s=14805&item=128178

What it does do is contribute to the explosion in the silver market eventually.

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Silver off to the races

As I predicted before, silver is having a breakout these days. And the evidence is piling up. One of the evidences of a bullish scenario is the silver stock at the CME. 

As you can see on chart 1, the silver stock at the CME is declining, ever since Eric Sprott did his PSLV offering of $US 200 million on the market on 12 July 2012. I predict that registered silver will start to decline soon (blue dots).

Once the silver price breaks the $US 30/ounce level, it's off to the races.

Chart 1: Silver stock at CME

Although the CME numbers amount only to 140 million troy ounces (Chart 1) (30 million ounces held by dealers at COMEX), while the silver supply from miners is around 760 million ounces a year, the decline in silver stock at the CME can be a small secondary indicator of declining supply (or increasing demand) in the silver market.

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The Status on Silver

This article is a summary on the most recent developments in the silver market. I will talk about the silver technicals, silver-gold ratio, silver investment, silver depletion, silver long/short positions and silver warehouse stock.

Let's start with the technicals. A pretty concerning picture for silver can be witnessed on the gold-silver ratio chart (Chart 1). You can see that in mid 2010, silver started to outperform gold until mid 2011. During that period, silver went from $US 18/ounce to $US 50/ounce (Chart 2). But recently, the silver price underperformed the gold price, with the gold-silver ratio going back to 60.

Chart 1: Gold - Silver Ratio

Chart 2: Silver Price

However, based on historical gold-silver ratios, we could go back to a 16:1 ratio as the trend in the gold-silver ratio is downwards (chart 3). We already had a second peak in 1992 at gold-silver ratio of 94 and we will go back to the low of 16.

Chart 3: Long Term Gold - Silver Ratio

Last year, silver had been doing well, going to $US 50/ounce and a gold-silver ratio of 30. Recently, we saw a correction in the gold-silver ratio back to 60. I believe that correction is over and many other investors including Eric Sprott acknowledge this. We're approaching a key technical point of a wedge pattern. Either we'll get a huge move to the upside or we get a huge move to the downside. I believe we'll see upside and we already see evidence of this. Just recently, the Sprott Physical Silver Trust priced in a follow-on offering of silver trust units in an amount of $US 200 million.

The fundamentals of silver are getting better and better every day. Concerning the depletion of silver, the New Scientist forecasted in 2005 that silver would be depleted in about 15-20 years. This means today we have only 10 years of silver left. Unlike gold, silver is being consumed as it is used in many applications. After consumption, the silver will be thrown together with its applications into land fills and will never be recovered. You could argue that silver can be recycled, but studies have shown that the recycling of silver is not feasible below a price of $US 50/ounce.

Silver scrap is a very important factor in supplying the silver to the markets because it comprises 22% of total silver supply. Since year 2000, the silver scrap to silver supply ratio has been steadily declining. Only just recently in 2011 we saw a spike in the silver scrap to silver supply ratio to 24.7% (Chart 4). This spike is due to the record high price of silver in 2011 ($US 50/ounce), which spurred investors to recycle jewelry and silverware. I expect this number to come down in 2012 as the silver price has been correcting.

Chart 4: Silver Scrap to Silver Supply ratio

Events like the offering of the Sprott Physical Silver Trust add to the velocity of depletion as investment demand will take silver supply out of the market. Manipulation of bullion banks to decrease the silver price only adds to the demand of investors to buy silver. We see this in the Silver Institute's 2011 report on silver demand/supply. The demand for silver coins went up an astonishing 18%.

On the net short positions of silver I want to make clear to investors that we are approaching a decade low in the Large Commercial Net Short positions (LCNS). Historically, when LCNS goes up, the price of silver goes with it. Basically this means that a huge spike to the upside is imminent.

Chart 5: LCNS silver

On the COMEX silver front we note that registered silver went up from 29.0 million troy ounce (25 April 2012) to 38.7 million troy ounce today, indicating that physical silver has been stocked in COMEX warehouses. Total silver inventories rose from 140.6 million troy ounces (25 April 2012) to 144.4 million troy ounces today (Chart 6). Rising stocks typically mean that there is less demand for silver, declining stocks typically mean there is more demand for silver. On chart 6 we see that stocks had been slowly rising in the previous months (less demand), but more recently, the stock has been declining again since the start of July 2012. Demand is picking up again due to seasonal strength in precious metals (month of July).

Chart 6: COMEX silver stock

On the more fundamental side of the economy we noted a very interesting event in the deposit facility of the ECB. Overnight deposits declined by more than half due to the ECB deposit rate cut. This 500 billion euro will basically find its way somewhere, possibly in the precious metals market.

Conclusion: It should be a very good time to invest in silver.

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Eric Sprott Taking Silver Off The Market With Offering

Yesterday, Eric Sprott priced a follow-on offering at $US 200 million, which is a 20% increase in its silver holdings. This will certainly increase the silver price at a faster pace by taking silver away from the market. Eric said silver would be at $US 50/ounce at the end of the year, maybe he's just trying to speed it up to get his call on being right. :-)

Too bad for PSLV holders who lost 4% premium, but I'm sure it will go much higher in the future.

Chart 1: PSLV Price Vs. Premium

P.S.: I'm going to stop monitoring the premium now as the PSLV site finally gives me the PSLV premiums in a nice chart! Looks like my requests came true. My first blog post ever, was about the PSLV premium and how it wasn't available on the PSLV site.



Sprott Physical Silver Trust Prices Follow-on Offering of Trust Units In An Aggregate Amount of US$200,005,000

TORONTO, July 12, 2012 /CNW/ - Sprott Physical Silver Trust (the "Trust") (NYSE: PSLV / TSX: PHS.U), a trust created to invest and hold substantially all of its assets in physical silver bullion and managed by Sprott Asset Management LP, announced today that it has priced its follow-on offering of 18,100,000 transferable, redeemable units of the Trust ("Units") at a price of US$11.05 per Unit (the "Offering"). As part of the Offering, the Trust has granted the underwriters an over-allotment option to purchase up to 2,715,000 additional Units. The gross proceeds from the Offering will be US$200,005,000 (US$230,005,750 if the underwriters exercise in full the over-allotment option).

The Trust will use the net proceeds of the Offering to acquire physical silver bullion in accordance with the Trust's objective and subject to the Trust's investment and operating restrictions described in the prospectus related to the Offering. Under the trust agreement governing the Trust, the net proceeds of the Offering per Unit must be not less than 100% of the most recently calculated net asset value per Unit of the Trust prior to, or upon determination of, pricing of the Offering.

The Units are listed on NYSE Arca and the Toronto Stock Exchange under the symbols "PSLV" and "PHS.U", respectively. The Offering will be made simultaneously in the United States and Canada by underwriters led by Morgan Stanley and RBC Capital Markets in the United States and RBC Capital Markets and Morgan Stanley in Canada.

Copies of the U.S. prospectus related to the Offering may be obtained by contacting Morgan Stanley & Co. LLC, 180 Varick Street, 2nd Floor, New York, New York 10014 Attention: Prospectus Department (telephone 866-718-1649 (toll free) or 917-606-8474) or by e-mailing prospectus@morganstanley.com, or RBC Capital Markets, LLC, Attention: Prospectus Department, Three World Financial Center, 200 Vesey Street, 8th floor, New York, New York 10281-8098 (telephone: 212-428-6670, fax: 212-428-6260). Copies of the Canadian prospectus related to this Offering may be obtained by contacting RBC Capital Markets, Attention: Distribution Centre, 277 Front St. W., 5th Floor, Toronto, Ontario M5V 2X4 (fax: 416-313-6066) or Morgan Stanley & Co. LLC 180 Varick Street, 2nd Floor, New York, New York 10014 Attention: Prospectus Department (telephone 866-718-1649 (toll free) or 917-606-8474) or by e-mailing prospectus@morganstanley.com. The Offering in Canada is only being made by the Canadian prospectus, which includes important detailed information about the Units being offered.

This news release does not constitute an offer to sell or a solicitation of an offer to buy the Units, nor shall there be any sale of the Units in any state or jurisdiction in which such an offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction.

For further information:

Investor Contact Information:
Sprott Physical Silver Trust
(416) 203-2310 or Toll Free: 1 (877) 403-2310
Email: bullion@sprott.com

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Sprott PSLV and PHYS premium fall to a record low

Today we record the lowest premium for the Sprott physical silver and Sprott physical gold trust, indicating a disinterest in gold and silver.

The premium for PHYS fell to a record low of 2.33% (Chart 2). The premium for PSLV fell to a record low of 5.86% (Chart 1).

(and if nobody wants it, it's time to buy it)

Chart 1: PSLV Premium (%) (blue) VS Price (USD) (orange)

Chart 2: PHYS Premium (%) (blue) VS Price (USD) (orange)

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