Sprott Physical Silver Trust Much Too Expensive

By DoctoRx

The heavily-traded shares of PSLV, aka Sprott Physical Silver Trust, trade at over a 20% premium to the value of the silver held by the trust. Meanwhile, every year, about 0.7% of the value of the trust goes to pay expenses, mostly a 0.45% annual fee to Mr. Sprott’s asset management company.

Back in the days three decades ago when the stock market was undervalued by every conceivable measure, funds such as PSLV traded at a discount to net asset value (NAV). A rule of thumb was that the operating expenses times 10 were a reasonable discount. Based on this, PSLV would trade at 7% less than NAV, not about 20% above NAV. There are of course offsetting factors; aren’t there always? The premium of PSLV to NAV actually has risen today as silver’s price has risen, even though the average investor in PSLV can purchase silver from one of many coin dealers at a modest premium to NAV. I find this to be disconcerting, because two of the most important indices of the vigor of the global economy, namely the US stock market and the price of oil, are down sharply today. For those who believe that silver is similar to gold as a form of money, please consider this correlation between the stock market and the price of silver. Deviations from the trend have been brief, understanding that SLV (the fund, which is a proxy for the price of silver itself) has far outperformed the average stock over this time period.

If global stock markets take a real tumble due to recession fears, investors should remember that lots of incremental demand for silver comes from industrial users. For all we know, they may have double-ordered silver due to fears of supply tightness and even for their own speculative reasons.

I have read that silver production is scheduled to ramp up significantly over the next few years (unlike gold). Meanwhile, as “the poor man’s gold”, silver is thus by definition in weaker hands than is gold. To pay 20% over the value of silver for a fund that charges a fee to hold it for you, with the possibility that when you want to sell PSLV no one will pay you any premium at all for this indirect form of silver ownership, appears to have undue risk and therefore “could” represent a top in PSLV. As was the case with Sprott’s gold fund, symbol PHYS, which shortly after coming public last year also traded at similarly high premia to NAV, owners of these shares can lose value as the months go buy even as the price of the metal the trust owns trends upward.

On a larger scale, given how high-profile Mr. Sprott has become, I am further concerned that the price action in PSLV portends at least mildly excessive speculation in the commodities space that tends to get “punished”, thus shaking out the weakest hands.

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