DID PSLV START THE RALLY?
2016-04-12 3pm EDT | #gold #silver #PSLV #Sprott #Yen
Remember last year when it was fashionable to crap all over gold? It was almost universally loathed.
CNBC even broadcasted a 2 hour special on how to take advantage of this “obvious” trade.
Mentioning you were bullish precious metals instantly got you labeled a kook. Even though gold prices were down 3 years in a row, everyone knew they were for sure going down a fourth.
Funny how the tune has changed.
Gold’s first quarter
Have a look at this great chart Bloomberg created:
Gold had its best quarter in three decades! All of a sudden, gold doesn’t seem so much like a “pet rock”.
I have rambled on too often about the potential upcoming great bull market in precious metals, so I will not bother repeating all the reasons.
First closed end fund deal in a long, long time…
But I wanted to take a moment to talk about an interesting development in the closed end precious metals funds square. I have long advocated buying Central Fund (CEF US Equity) as a terrific way to buy gold and silver. This closed end fund still trades at a discount, albeit it has been narrowing recently.
I expect the discount to eventually rise to a premium (where it traded for most of the past 20 years).
I would like to highlight an interesting development in another closed end precious metal fund. The Sprott Physical Silver Trust (PSLV US Equity) is a closed end fund that holds silver bullion outside the US banking system. At one point in 2011, at the pinnacle of the precious metals frenzy, PSLV was the hottest ticket out there. At that time hedge funds were terrified of Bernanke’s QE programs, and their fear of the 1933 confiscation sent them clamoring for products outside the US banking system. Sprott’s silver fund even traded at an amazing 33% premium for a short period. Eventually the precious metals bear market eroded that premium down to a level where PSLV bounced around NAV.
But over the past two months PSLV has steadily traded at a higher level versus its NAV. Last week this premium went high enough that Sprott did a secondary issue in PSLV. 12.3 million shares were issued at $6.09. The key to this transaction was that the premium was high enough that even after dealer commissions, the fund did not suffer any dilution. It was done at a slight premium to NAV after commissions.
Way back when, I used to trade all the precious metals closed end funds. When the premiums to NAV hit levels where I knew the funds would be willing to do new issues, I would short the fund and hedge it with the appropriate precious metal position. I would then just wait for the news and cover into the new issue. Sometimes I would have to wait longer than I wished, and other times the spread narrowed without a deal, but on the whole, it was a decent little trade.
Over the years I observed an interesting behaviour in the days following one of these deals. Most of the time, the price of the underlying precious metal just kept rising after the new issue. Even though the deals did not seem large enough to affect the price of the metal, it seemed to happen time and time again.
I developed a theory as to the reason for this phenomenon. Although the actual transaction was not causing the ensuing price rise, closed end fund deals only occurred when the demand for the precious metal was high. Closed end fund deals were a symptom of rising precious metal demand, not the cause. The underlying demand was the real cause of the ensuing price rise.
As for the recent PSLV deal, it was only $75 million of new silver demand. That’s a little more than 900 silver contracts. It’s big, but by no means market moving size. Yet have a look at the price action of silver since that deal.
Silver has soared since then. It has risen 6.5% while gold is up just a little more than 2%. Silver is running like it stole something.
I know this analysis is late, and it would have been much more relevant before silver ripped $1 higher. But I don’t think this PSLV will be the last precious metals closed end fund deal by any means…
Be careful of a US dollar rally
I love precious metals, but I am leery of a potential US dollar rally causing some hiccups for this latest gold rise. To counter this, I am hedging by a portion of my position by shorting some Yen. I know, that seems kid of crazy, but the Japanese cannot afford to have the Yen rise significantly. Gold denominated in Yen is still a trade that will work in the long run. This latest move from 0.145MM Yen per gold ounce down to 0.135MM Yen offers a great entry point.
Thanks for reading,