Thursday, January 26, 2012

Sprott Physical Silver Trust NAV (PSLV): Part Three

Back on January 8th, I wrote an article titled Purchasing Precious Metals: NAV Considerations where I discussed that the premium to purchase silver in the Sprott Physical Trust (PSLV) had crossed over 32%.  I threw up a cautionary flag to those in the fund and I recommended other alternatives, such as the Central Fund of Canada (CEF).  The premium of the Sprott fund collapsed the following week, while the premium of the Central Fund of Canada rose, which I discussed in Precious Metals: NAV Update: PSLV.

As of this morning, the premium of the PSLV was at 6.25% and I believe now is the time to re-enter.  The first week of January, I sold out of the PSLV and moved it all into the SLV.  This morning I did the opposite, selling SLV and moving it all back into the PSLV.

To discuss why, let me use a poker analogy because I have recently been playing a lot of poker and it is on my mind.  Poker, to me, is 90% a game of math.  For every decision of every hand, I calculate the number of chips I have in my stack against the number of chips in the pot against the number of chips my opponents' hold.  That is then weighed against my current hand and the cards shown to come up with pot odds and implied pot odds.  The amount of math that takes place in a single poker hand is pretty amazing, which is why I love to play.  It keeps my brain working, similar to someone who enjoys playing chess, doing crossword or Sudoku puzzles.

To make a long story short, let's say you have two hearts in your hand and you are hoping for three more hearts by the last card to make the flush.  At that point, you expect to win the pot, a big pot, which impacts your betting.  However, there is always an outside chance that someone may have a higher flush, at which point you are probably going to lose all your chips.

This is the way I woke up this morning looking at the PSLV.  The premium is currently at 6.25%.  Could that fall further?  Definitely.  However, there is an outside chance that the SLV fund does not have 100% of the physical silver backing its price.  This is an unknown, the equivalent of someone having a higher flush, in which the silver price could still rise (I hit my hand), but I end up losing big (higher unknown flush hits). I would rather not take that chance and just pay the premium.  There is always the chance that the premium rises again as physical silver supplies tighten up.  I will continue to monitor the NAV's week to week and keep readers aware of opportunities (and danger).

For those that play poker, I hope you appreciate the analogy.  For those that do not, you get a brief glimpse into the elaborate decision making process behind a simple investment or the simple decision to call or fold on every hand.


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