Explaining Today's Silver Surge

Tyler Durden's picture




 

A few days ago, Eric Sprott decided to take advantage of the record premium over NAV of his physical silver fund PSLV (or for some other arbitrary reason) and to issue a $300MM follow-on offering, whose proceeds would be used to buy up silver to add to PSLV's existing physical holdings. Naturally, as soon as the news broke, the premium dropped to about 10%, making PSLV holders unhappy. This is not the first time that Sprott has done this: as a reminder after his April 2011 follow on offering in PHYS, we were fully expecting a comparable physical sequestration to occur via PSLV, to wit: "It appears to have already had an impact on silver, which jumped by $20 cents to another 31 year high on the news, as the market now likely expects a follow on offering in PSLV as well imminently." About 10 months later, it finally happened. As was to be expected, any short-term gains focused investors obviously became angry that by collapsing the premium, which we speculated was shortage driven, they have suffered a hit to their P&L (expressed in dollars of course, which as a reminder to the holders, should be largely irrelevant, especially to those who believe a PM-based barter system is imminent). Yet they forget the flip side to the equation: the money taken out of the premium, would be promptly used to take silver out of (hyper hypothecated) circulation, in other words, in the closed system, the drop in Premium would translate in a rising price in the underlying. Which according to UBS is precisely what has happened, and why silver moved as much as it did. Quoting from FMX Connect: "Today’s incredible move was the culmination of a comment made by UBS analyst Edel Tully. He stated that hedge fund manager Eric Sprott may be in the market buying spot futures in a private letter to his clients." And even as the premium dropped, the price of spot silver increased by over 5%, on the speculation of silver being taken out of the market and delivered to Sprott.

So to summarize: speculation that $300 million in physical silver may be taken out of circulation raises the price of the underlying by 5%. Does that mean that a $3 billion follow on would result in a 50% rise in spot; $30 billion in 500%, and so on? Something tells us the trade off of the premium collapsing to zero in exchange for $100+ silver would be equitable... And as we noted previously, the primary reason for the surge in in the NAV could be many things, but shortage of real physical silver is certainly the most likely one (and good luck trying to buy, transport, store, and insure $10MM or more in physical, without relying on some true physical representation such as PSLV). And if UBS' speculation is true, this has just been confirmed. Most importantly, it once again raises the spectre that anyone wishing to corner the silver market, can do so quite easily even in the aftermath of last year's parabolic move.

Full note from FMX Connect:

Market Recap:

As of the globex close, March Silver was up an astonishing 5.4% ($1.66) on the day, crushing big brother Gold (up .76% on the day). Silver was up an impressive 11 hours in a row, starting from 7 AM. Please enjoy our special commentary below.

Over the last week, and particularly today, silver saw heavy buying. FMX | Connect Managing Partner Vince Lanci discussed the potential for a breakout higher two days ago in an  interview hosted by Kitco News (WATCH IT HERE). Of particular note, when asked his opinion on Silver was “If you’re bullish on Gold you should buy Silver.”

Today’s incredible move was the culmination of a comment made by UBS analyst Edel Tully. He stated that hedge fund manager Eric Sprott may be in the market buying spot futures in a private letter to his clients. With declining open interest in a rallying market, it didn’t seem likely to us, but over the last two days we noted open interest has flat-lined and started to turn upward, a bullish indicator.

Intraday moves did not care about how the Euro did or how gold traded. When Silver crossed the 50-day moving average at 30.90 it left Gold in the dust. While thousands of Call butterflies traded in gold over the last few days,they ended the week essentially unchanged.. But the hundreds of calls purchased over the last few days in Silver proved to be big winners for longs with the May 40 Strike garnering the most interest. Finally, note the commitment of traders shows an increase in commercial shorts (an increase of 1,320). This means the bullion dealers have not thrown in the towel and this could just be a market fading away from an impulsive buyer. We’ll wait and see.

Directional Commentary:

Options: Gold volatility was lower going into the weekend and ahead of February options expiration next week. Skew was selectively higher. Options activity remains mostly neutral and is unlikely to manifest strong biases while futures trading is orderly. Conclusion: Neutral

Technical: Gold finished almost $10 higher on the day but still below the highly-cited 50-day moving average at 1673.60. We see this moving average as a strong impediment to gold’s near-term prospects. As a contrasting indicator, open interest has started to creep higher in Jnauary. This (and other factors) leads us to believe that Gold may be due for a near-term correction, but maintain it upward trajectory in the intermediate term.  Gold’s objective to the upside is a settlement above 1674 and its objective to the downside is a return to 1600. Conclusion: Neutral

Active Options

G 1675 C, G 1700 C
G 1600 P
H 1700 C
M 1900 C
Z 2000 C, Z 1100 P

ATM Volatility Curve:

As of 1:30 P.M.

image

Volatility Smile:

***From NYMEX Settlement

image

 

End of Day Straddles
GC                  
      Future     Bid     Offer
G12     1664     25     29
H12     1666.8     65     69
J12     1666.8     101     105
K12     1669.7     130     134
M12     1669.7     156     160
N12     1672.1     182     186
Q12     1672.1     205     209
U12     1674.5     230     234
V12     1674.5     249     253
X12     1676.9     268     272
Z12     1676.9     286     290

As of 1:30 P.M.

 

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Fri, 01/20/2012 - 20:34 | 2082914 Long-John-Silver
Long-John-Silver's picture

Silver Bitchez!

Fri, 01/20/2012 - 20:42 | 2082933 trav7777
trav7777's picture

yes I did try to long SLV short PSLV...no fkin shares to borrow

Fri, 01/20/2012 - 20:55 | 2082964 Not For Reuse
Not For Reuse's picture

so why didn't you just long ZI, instead of coming back and continuously bitching about it in 10+ posts? Need to work on the whole "outside box" thing

Fri, 01/20/2012 - 21:17 | 2083028 narapoiddyslexia
narapoiddyslexia's picture

See the link - http://www.bloomberg.com/video/74304064/

Edel [pronounced A-dell] is definitely not a "he."

Fri, 01/20/2012 - 21:32 | 2083062 aphlaque_duck
aphlaque_duck's picture

"long ZI"?

Fri, 01/20/2012 - 21:54 | 2083120 Not For Reuse
Not For Reuse's picture

what I like about Trav is that he understands BNW, and that he shares a first name.

What doesn't makes sense is approaching it based solely on IQ.

The whole point of BNW is to stratify.

I would rather have 10 helpful retards working for me, in proven physical capacities, than live in a world where everyone is 2 sigmas to the right and they all think they are god's gift to earth.

PS, I've got your long ZI right here

Sat, 01/21/2012 - 01:23 | 2083446 trav7777
trav7777's picture

I see your point and that's a valid argument.  IQ is just a starting point.  We don't have a system where retards are stratified...they get to vote here.

I'm not looking to stand up alpha island, but I do believe that Huxley was off-target on that, given the tendency of higher IQ societies like Scandinavia to be in far better shape.  Smart people are qualitatively different than the dumb, and this is something that seems to have escaped Aldous.

I wanted a PAIR TRADE, not a long futures position...wasn't I clear?

Sat, 01/21/2012 - 03:38 | 2083634 Not For Reuse
Not For Reuse's picture

Scandinavia is definitely something to reflect on.

All I'm saying is, if X is supposed to = Y, and X = 1.3Y instead, and you CAN'T get the short leg of a pair trade... Antediluvian probability theory, I know

Sat, 01/21/2012 - 09:29 | 2083893 UGrev
UGrev's picture

Hail, my bit..er.. subjects! for my lineage goes back to 810AD to the father (Halfdan the Black) of the first king (Kong) of Norway (Harold I). Eff your trades.. I'll just take an axe to your neck and take it...with my bare hands!! /end morning humor

Sat, 01/21/2012 - 12:22 | 2084117 ZeroSpread
ZeroSpread's picture

...actually..where is Robo, miss his "input" explaining why things swung this way today and why next week will be "worse" ;-)

Sat, 01/21/2012 - 14:30 | 2084423 NewThor
NewThor's picture

Imagination WTFPWNS IQ &/or Math

language is a big stumbling block of free will

the enemies gate is down

Superman, where are you now?

Sat, 01/21/2012 - 04:26 | 2083694 Max Fischer
Max Fischer's picture

 

 

.....and this is something that seems to have escaped Aldous.....

Given that the structure of DNA wasn't discovered until 20 years after the publication of BNW, it is not surprising that Aldous would have some gaping holes in his genetic engineering fantasies. For you to have been duped by something so obvious casts* you squarely into the Epsilon negatives.  

I had never thought of it before, but I bet the possibilities presented in BNW really appeal to you.  Finally, poor whitey will get some respect for all those transistors and refrigerators he invented!  The only problem with being one notch above the blacks, is that you're still two notches below the Asians and Indians (dots, not feathers). Perhaps if we thoroughly sterilize, dehumanize and whitewash mankind into perfect little groups devoid of individual character, all the KKK trailer park pigs won't seem so reprehensible - and, well, that's a plus.   

Max Fischer, Carpe Hunc

*yes, that's a pun. 

 

Sat, 01/21/2012 - 15:08 | 2084539 Ahmeexnal
Ahmeexnal's picture

Finally, poor whitey will get some respect for all those transistors and refrigerators he invented!  The only problem with being one notch above the blacks, is that you're still two notches below the Asians and Indians (dots, not feathers).

What angers Trav the most is being 10 notches below "the tribe".

Sat, 01/21/2012 - 10:05 | 2083931 GMadScientist
GMadScientist's picture

You wanted a pair trade, but waited until the last minute to put it on (like the lilly-white pussy you are) and got punked.

Teeny violins, motherfucker.

Sun, 01/22/2012 - 02:21 | 2085931 delacroix
delacroix's picture

I knew a guy with a masters degree, who couldn't change a flat tire. I knew a kid, that most thought was mildly retarded, who could jury rig broken things to work, with stuff he could find, for free. once you get put in a box, it's hard to get out.

Sun, 01/22/2012 - 20:04 | 2087208 UP Forester
UP Forester's picture

If you want to ponder the theory of relativity, quantum mechanics or the entire history of Keynesianism, find someone with a PhD.

If you want to fix anything with shit left over from the last 100 years or so, come to the U.P.

Nobody up here has any money to pay anyone, so we build, grow and fix everything ourselves.

Fri, 01/20/2012 - 21:09 | 2082999 tmosley
tmosley's picture

Keep trying, dumbass.  Use any savings you have for the kid's college accounts.  Use your last fucking penny in that trade.

Fri, 01/20/2012 - 21:13 | 2083013 francis_sawyer
francis_sawyer's picture

aka - "The Gerber Plan"

Fri, 01/20/2012 - 21:22 | 2083035 bob_dabolina
bob_dabolina's picture

Steve Jobs

Mark Zuckerburg

Bill Gates 

John Quincy Adams 

All dropped out of college. College is a sham and with todays inflated prices an outright ripoff; $60,000 a year to go to Columbia. A four year degree costs $240,000 and that doesn't even count books (which is probably another $10,000)

Fri, 01/20/2012 - 21:27 | 2083050 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Zuckerberg is Scull and Bones, Gates was hand picked by the Illuminatti, and Jobs was born into the system, because he is a jewe.

Fri, 01/20/2012 - 21:29 | 2083053 bob_dabolina
bob_dabolina's picture

Nothing for John Adams? Not even a Free Mason ref.?

Fri, 01/20/2012 - 21:39 | 2083078 Bay of Pigs
Bay of Pigs's picture

Maybe he owned slaves and wrote Brown Sugar that was later made famous by the Rolling Stones.

He wasn't called Big John Adams for nothing...

And Bob, we didn't quite see the "low 20's" in silver you called for by the end of 2011, but close enough at $26 or so. You called it much better than I did. I stand corrected.

Fri, 01/20/2012 - 21:50 | 2083086 bob_dabolina
bob_dabolina's picture

Steve Jobs owned slaves, they just happened to reside in China. 

Fri, 01/20/2012 - 22:00 | 2083129 Bay of Pigs
Bay of Pigs's picture

Not a fan of Zuckerburg or Gates, although I'll cut Jobs some slack. 

College or no college, Adams doesn't belong on a list with any those guys.

Fri, 01/20/2012 - 22:09 | 2083160 bob_dabolina
bob_dabolina's picture

Larry Ellison 

Michael Dell

Kirk Kirkorian

Ted Turner

Ralph Lauren

Roman Abramovich (it pays to have a bestie like Putin)

Annnnnd....

Andrew Lloyd Webber were also relatively recent dropouts

Some older ones were

Howard Hughes

John D. Rockefeller

If you were interested.

Fri, 01/20/2012 - 22:16 | 2083186 fuu
fuu's picture

Jon Huntsman

Fri, 01/20/2012 - 23:19 | 2083274 Oh regional Indian
Oh regional Indian's picture

Bawney Fwank Hunts Man.

?

Silver Hunts.....Brothers?

ori

gold-de-spell-ed/

Sat, 01/21/2012 - 02:16 | 2083563 hamstercheese
hamstercheese's picture

Ian Anderson dropped out of high school...

Sat, 01/21/2012 - 22:45 | 2084601 DanDaley
DanDaley's picture

Degrees are mostly crap, really, other than as an entrance ticket.  I've known many multiply-degreed people who were DTABOR -dumber than a box of rocks.  Screw the degree, show me what you can do!

Sat, 01/21/2012 - 02:16 | 2083564 BidnessMan
BidnessMan's picture

And threatening mass suicide.

Fri, 01/20/2012 - 21:56 | 2083131 Vic Vinegar
Vic Vinegar's picture

Zuckerberg is Scull and Bones, Gates was hand picked by the Illuminatti, and Jobs was born into the system, because he is a jewe.

Perhaps that's a joke that I am too dense to comprehend.

Fri, 01/20/2012 - 23:04 | 2083259 BLOTTO
BLOTTO's picture

In the case of both Google and Facebook, three talented students in their 20's came out of obscurity to establish multi-billion dollar enterprises. Do you suppose they had some help?

He is one of the most ''successful entrepreneurs'' in the last decade. Having made a fortune through his Facebook empire, he reaches more than 500 million people worldwide. It seems like a fairytale. A student creates a new interface to connect the people throughout the world. Well, it sounds great doesn't it? It would, if we were true. 

Here is a good video that demonstrates that Facebook was indirectly funded by the CIA with the goal of learning and storing everything there is to know about you. Why? To monitor and ultimately control.

Still pretty fuckin funny now eh?

Zuck: Yeah so if you ever need info about anyone at Harvard

Zuck: Just ask.

Zuck: I have over 4,000 emails, pictures, addresses, SNS

[Redacted Friend's Name]: What? How'd you manage that one?

Zuck: People just submitted it.

Zuck: I don't know why.

Zuck: They "trust me"

Zuck: Dumb fucks

Fri, 01/20/2012 - 23:18 | 2083271 Vic Vinegar
Vic Vinegar's picture

That link is dead dude.  And Zuckerberg is a chubby nerd with a shitty looking gf.

http://www.byroncrawford.com/2010/08/facebook-founder-has-average-house-and-car-busted-asian-girlfriend.html

Sat, 01/21/2012 - 10:52 | 2083985 mendolover
mendolover's picture

ooof.  Wasn't FB originally for the preppy scum to rate each others gf's?  Wonder how he would have fared back then with this yung lady?

Fri, 01/20/2012 - 23:44 | 2083299 Freddie
Freddie's picture

Who did Larry Ellison work for as a contract programmer was developing Oracle's database?  CIA.

Fri, 01/20/2012 - 23:54 | 2083314 Vic Vinegar
Vic Vinegar's picture

Is there a less user-friendly interface than Oracle?  I'm trying in vain to look up an account balance and somewhere L.E. is kicking it on his yacht.  Something is very wrong with this picture.

I don't know if your comment is accurate, but I appreciate you changing it up.  And if this is true, is the key takeaway from it that the primary driver of success is CIA experience?  Because if it is, I would like to apply for a gig at the CIA.  They probably don't need to do a background check on me as one was already done after I started commenting here.  LOL!

Sat, 01/21/2012 - 00:51 | 2083402 jomama
jomama's picture

there was friendster and myspace before facebok.  it's not like the guy invented the wheel.

he was lucky in the sense that it was a website that was originally free of ads, and where you couldn't make face profiles.

right place at the right time.  and it wouldn't surpise me in the least if he had a little federal help to squeal on your neighbor, so to speak.

Fri, 01/20/2012 - 23:14 | 2083267 Bausti
Bausti's picture

JQA was educated at the best schools in Europe, (back then they were far superior to our colleges) while being John Adam's  (his dad's) secretary.  He spoke French before he spoke English which spooked his father.  JQA was far ahead of his contemoraries in America.  The Monroe Doctrine of James Madison, which was keep Europe out of America, was his brain child.  We are still learning this lesson.  Europe has been a mess for over 3 centuries.

Sat, 01/21/2012 - 04:28 | 2083695 slewie the pi-rat
slewie the pi-rat's picture

i've always been a little troubled by john & abigail's roles in forging and using the alien and sedition acts of 1798

how this might effect dad's secretary is anybody's quess

American Experience | John & Abigail Adams | People & Events | PBS

Sat, 01/21/2012 - 00:01 | 2083331 insidious
insidious's picture

I'm not, and almost no one is in the class of the individualy you mentioned, but I got a job as an engineer because I have a degree in engineering, my wife got a job as a teacher because she has a bachelors and a masters in education. My daughter just got a great job as an RN and she would not have gotten the job without an education and a degree - but I agree that the whole college thing is way to expensive.

Sat, 01/21/2012 - 09:09 | 2083877 StychoKiller
StychoKiller's picture

Govt subsidizes unqualified college students, that don't really concern themselves with tuition expenses, since Big Brother is picking up the tab.  Is it any wonder then that universities start sucking harder at the teat?

Fri, 01/20/2012 - 21:15 | 2083020 The Deleuzian
The Deleuzian's picture

Trav...That's a good strategy...Central Fund and Sprott always seem to underperform...Hey, collect the scraps...Nothing wrong with that...

Fri, 01/20/2012 - 23:59 | 2083324 slewie the pi-rat
slewie the pi-rat's picture

i got into that comment of trav's too!

transpersonal deleuzians?  L0L!!!

but after reading tyler's intro, i mechanically thought of the arb:  sell PSLV, buy silver, myself!  so, i found it fascinating that trav "couldn't borrow the shares" for the short leg

apparently, if we take him @ his word [& why not, trav BEing trav?], he was late and all the available shares had already been borrowed and sold OR his broker didn't figure he was "worthy" of this trade and fed him a line of BS~~~same result

i never heard of someone not being able to short an ETF, so a did a little research and PSLV is not an ETF, it is an ETV~~~ExchgTradedVEHICLE.  next:  what's the diff?  wheels?

Euronext - ETV segment > FAQ  had the answer for me (paste): 

What are Exchange Traded Vehicles (ETVs)? ETVs are simple and transparent open-ended securities which trade on regulated exchanges. ETVs enable investors to gain exposure to assets without trading futures or taking physical delivery. ETFS-branded ETVs are secured, undated, zero coupon notes that are designed to accurately track the underlying asset index or individual asset. Are ETVs very similar to Exchange Traded Funds (ETFs)?

ETVs are similar to ETFs because they are both open-ended, continuously traded and have multiple market makers. The main difference is that ETVs use a secured, undated, zero coupon note structure, whereas ETFs typically use a fund structure.

so, now i know!  now i'm wondering is the "no shares available for shorting" is a widespread phenomemon or just a brokerage thing at the time trav tried to place the order?

Sat, 01/21/2012 - 00:19 | 2083352 The Deleuzian
The Deleuzian's picture

I've never heard of anything the 'big boys' concocted you couldn't short...This is really interesting...The whole 'Vehicle' thing kind of scares me...

Question is...How much legroom does it have? 

Sat, 01/21/2012 - 01:06 | 2083420 CompassionateFascist
CompassionateFascist's picture

None. And when TSHTF - unless you're a good friend of Eric, or Warren, or George - no engine.

Sat, 01/21/2012 - 01:08 | 2083421 CompassionateFascist
CompassionateFascist's picture

 

Sat, 01/21/2012 - 01:10 | 2083424 Putty
Putty's picture

There was no available borrow. The short stock rebate was quoted low, but nary a share to be had. The little folks aren't allowed to play.

Sat, 01/21/2012 - 01:30 | 2083455 trav7777
trav7777's picture

bingo...maybe i could have synthetic'd it with some puts or a vertical credit spread or something.  Will have to investigate NAV premium ranges for a good entry, but the pair trade is a guaranteed winner

Sat, 01/21/2012 - 01:55 | 2083514 slewie the pi-rat
slewie the pi-rat's picture

not sure how to get a synthetic up to that 30% for the arb/pair short

maybe short a reverse mining ETF or something

this IS nuts!  when i first thought of that, i thought it was funny, but now it's starting to make sense! 

gee!  maybe i have a magic bong!

bingo-bongo, BiCheZ?

Sat, 01/21/2012 - 02:47 | 2083605 The Deleuzian
The Deleuzian's picture

When NUGT/DUST changed from 2X to 3X a few weeks back...Any big pullback in the miners is gonna shove this bastard (NUGT) back against the wall with a spring...How much can get shaved off without this becoming some sort of twisted Zeno's paradox?

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