07 March 2014

Sprott PHYS redemptions arbitrage driven

Sprott PHYS fund redemptions show up in the first few days of a month, and for March there were no redemptions. This lack of news is actually news as it confirms for me that the redemptions we have seen in the past (see here) were driven by an arbitrage opportunity.

Below is a graph that demonstrates this. First I took the reported premium/discount to Net Asset Value (NAV) and subtracted the $5 per ounce redemption cost. This is graphed in green (for a profit) and red (for a loss) in percentage terms on the right hand scale. When it is green, you can make a profit buying PHYS shares at a discount to NAV, redeeming, and then selling the physical gold at the higher spot market price.

Second, I graphed the amount redeemed on the left hand scale and shaded the months during which the shares would have been accumulated to do the redemption. You'll note that the shaded periods run from the 16th of a month to the 15th of the next month. This is because you have to submit your redemption request to the fund by the 15th of each month to give the fund 2 weeks to process and get your gold ready for delivery by the end of the month.


You can see from the chart that the redemption accumulations only occur when there is an arbitrage profit to be had and cease when there is no profit.
 
PHYS first started to go into discount during April 2013 (prior to that it had always traded at a premium). However, while there was some arbitrage profit in May/June, that month only showed a redemption for 400oz. I think this is explained by the fact that PHYS was only showing small discounts to NAV and a trader or bullion bank first wanted to test the redemption process before redeeming in bulk. Hence they redeemed exactly one LBMA bar - not coincidental I think and strongly suggestive of a test transaction.
 
As the discount persists into the Jun/July and July/August periods we see the trader ramp up the redemption quantities. I note that as a percentage of PHYS' trading volume for those months, the units redeemed were only 0.6% and 1.6% respectively. That is quite low. August/September presented no arbitrage opportunity so we don't see any redemptions.
 
But in September/October and subsequent periods, the discount (and arbitrage profit) reappears and we see the redemptions increase. Note that while the next two redemptions are similar in ounces to Jun/July and July/August periods, due to lower trading in PHYS they represented 12.1% and 16.5% of trading volume respectively. This is getting quite high but the buying of PHYS did not drive PHYS back into a premium, so in the next two months the traders must have felt more confident and really ramped up their buying to the 3 tonne level, and at 28.9% and 30.1% of PHYS' trading volume in November/December and December/January respectively.
 
I am wary of ascribing causality here, but do wonder if this high level of buying relative to the number of shares of PHYS that normally trade did result in the fund returning back into a premium to NAV from January onwards. That is what arbitrage in theory should do.

I would note that the redemption activity we see may not be an arbitrage trade (that is, someone just looking to pocket the different in prices) but also a physical investor who is not interested in holding a fund and just sees PHYS as offering a cheaper way of getting physical. In either case the result is the same.
 
I'll keep track of this data and post if there is any action that further confirms, or contradicts, the theory that a trader or investor is opportunistically taking advantage of PHYS trading at a discount to NAV.

23 comments:

  1. i am bookmarking this. I am sick of tping a new response on how this works every time I hear GLD IS BEING RAIDED OMGZ

    ReplyDelete
  2. GLD being "raided" is a fallback method of reasoning to always whip out when the price of gold drops or rises marginallly.

    JPM's rumored long gold comex position and GOFO are another example of oft mentioned reasons for golds stagnant action or it's "imminent" breakout.

    Thanks for the new post Bron. It tells me there is a huge surplus of silver available.
    All the shills out there spouting off about BTFD and a silver shortage not too long ago were full of sh!t.

    Doesn't it strike some of you as odd and obvious that most of the silver pumpers (who were grossly wrong) are now fixated moreso on gold and it's machinations?

    Making it up as they go along.

    ReplyDelete
  3. Huge surplus?

    Square peg, meet round hole...

    Where do you get that from this information? As Bron said... it's being used to skim the premium or to accumulate the metal at a lower cost.

    Bron... but why wouldn't they use the much higher premium in the Ag fund to arbitrage?

    ReplyDelete
  4. And as I am sure you are aware, there may be a linkage to a greater market force between the opportunity for an arbitrage profit in PHYS and something else, right? And you have looked at forwards and lease rates for example, and physical deliveries in Shanghai and Hong Kong.

    Causality and all that.

    ReplyDelete
  5. In other words, surely someone of your caliber would not make the mistake of looking at the PHYS price phenomenon in isolation, given that it is a closed end fund designed to track the macro price of a global commodity.

    There *could* be a linkage between naked shorting of the fund or some other specific fund issues that would create the arb opportunity, that is, a market inefficiency to be exploited.

    But it could be part of a greater phenomenon, in which let's say most of the Western funds and ETFs were losing gold bullion, unlike silver.

    ReplyDelete
  6. There’s faith in PHYS
    Cuz PHYS gots phyz
    So they arb the PHYS
    Cuz the phyz in PHYS
    Is where Sprott says it is

    So PHYS gots their phyz, go and see
    But where’s the phyz at the GLD?

    Well, it used to be here
    But it’s no longer near
    If not here, please tell me where
    Why it’s safely Far East and “over there”

    So where’s the faith in GLD?
    Is their phyz where they say it is?
    Well, it might have been or it used to be
    But today it’s “min” so go and see

    ReplyDelete
  7. And as I am sure you are aware,
    There may be a linkage somewhere
    To a greater market force “over there”

    Between the opportunity
    If you look you can see
    Of an arbitrage profit, and a brokerage fee?

    You must have some insight
    In PHYS and something else, right?
    And you have looked at forwards and lease rates, or are we wrong?
    For example, and physical deliveries in Shanghai and Hong Kong?

    So consider the linkage
    Search for the answer, even talk to Wo Fat
    Look for the truth, Causality and all that.

    ReplyDelete
  8. From there to here,
    From here to there,
    Funny things are everywhere.

    Into Shanghai, some gold likes to run.
    It runs for fun to the land of the sun.
    Oh me! Oh my! Oh me! Oh my!
    What a lot of funny things go by.

    Some with serial numbers like one, two, three and four.
    Some might be tungsten, low purity and more.
    Where do they come from? I can’t say.
    But I bet that have come a long, long way.

    ReplyDelete
  9. My Fort is old.
    My contents are gold?
    I have a secret I like to hold.
    My figures are off.
    My vaults are cold.
    My numbers are off.
    My gold is sold.
    I have a secret I like to hold.
    My deception is old.
    Could I hold that much gold?
    And melted coins that used to be rolled?
    Ask for an audit? You can’t be that bold!
    And now my story will never be told

    ReplyDelete
  10. Jesse -
    Bron wrote this post for you, and it's amazing that you still don't get it. You *must* understand why PSLV isn't losing silver, right? And perhaps you can draw a similar analog to SLV and figure it out...

    GLD and SLV "lose" metal when they trade cheap to NAV and arbs step in: buy the ETF, sell the metal, redeem from the ETF to cover their short.

    PSLV sheds a lot of light on the "WHY NO SILVER REDEMPTIONS?!?!" question: silver hasn't been trading as cheap as gold has, due to the way traders/investors have reacted.

    You should look at CEF too: it's discount for almost a year now is illustrative of the lack of interest on the part of gold/silver investors, which maybe, just MAYBE might have something to do with the reason the metals got destroyed last year.

    or it could just be an evil bankster cartel...

    but you should take your own advice - don't look at PHYS in isolation: look at all the closed end funds and the action in GLD and you get a very clear picture of exactly what is going on the the metals world. here's a hint: it's NOTHING like what you and your charlatan buddies preach...


    best,
    KD

    ps - it has nothing to do with "naked shorting"

    ReplyDelete
  11. GLD and SLV "lose" metal
    When they trade cheap to NAV
    The difference isn’t subtle
    Once you see less gold in the GLD

    Than you would expect to see
    By comparing just price erosions
    To enormous liquidation explosions

    So will the gold that left GLD
    Ever come back once we see
    The gold price begin to rally?

    Alas and Alack, sorry KD
    The gold is gone but locked safely
    In a place on the map that’s kinda Eastly,
    Melted to kilo Identity
    After a Swiss-refining for their purity

    ReplyDelete
  12. GLD and SLV "lose" metal
    When they trade cheap to NAV
    The difference isn’t subtle
    Once you see less gold in the GLD

    Than you would expect to see
    By comparing just price erosions
    To enormous liquidation explosions

    So will the gold that left GLD
    Ever come back once we see
    The gold price begin to rally?

    Alas and Alack, sorry KD
    The gold is gone but locked safely
    In a place on the map that’s kinda Eastly,
    Melted to kilo Identity
    After a Swiss-refining for its purity

    ReplyDelete
  13. HOW "BOUT SOME CREDENCE:
    Long as I remember inventory comin' down
    Clouds of mystery pourin' confusion on the ground.
    Good men through the ages tryin' to stop the pain.
    And I wonder still I wonder who'll stop the drain.

    I went down to Jesse’s seekin' shelter from the storm
    Caught up in the fable I watched Shanghai’s pile grow
    Five year plans and new deals wrapped in golden chains.
    And I wonder still I wonder who'll stop the drain.

    Heard the singers playin', how we jeered when it was sold.
    The crowd had rushed together tryin' to keep our gold
    Still the drain kept pourin', fearin' GLD would fold
    And I wonder, still I wonder who'll stop the drain.

    ReplyDelete
  14. HOW 'BOUT SOME LENNON
    Every shill is talking and no one says a word
    China taking gold not with much restrain
    There's Russians on an island just below Ukraine
    Regulators “lookin’ into it” and nothing going on
    There's always manipulation but shillers say it’s not
    They're shipping it back to China so keep the gold you got

    Nobody told me there'd be days like these
    Nobody told me there'd be days like these

    Strange days indeed -- strange days indeed

    All the gold is runnin' and no one makes a move
    All the east’s a winner, westerners left to lose
    There's a lota yellow metal to the north of Katmandu
    All the gold’s a-flyin’and and leaving western ground
    Every goldbug crying and no one makes a sound
    There's a place for gold in China it’s just gotta lay around

    Nobody told me there'd be days like these
    Nobody told me there'd be days like these
    Strange days indeed -- most peculiar, mama

    A lot of bankers dying jumping from buildings high
    There’s another one a jumpin’ just look up in the sky
    Some from high over New York and I ain't too surprised

    Nobody told me there'd be days like these
    Nobody told me there'd be days like these
    Nobody told me there'd be days like these
    Strange days indeed -- most peculiar, mama
    ROLL!

    ReplyDelete
  15. Sheer lunacy 24/7...

    http://www.tfmetalsreport.com/comment/390265#comment-390265

    ReplyDelete
  16. Kid,

    First of all calm down. Stop your capital letters and your exclamation marks. You are the best and everyone else in the gold world is a charlatan. We know that, no further need of reaffirmation from your side.

    I profit again this opportunity to thank you for opening our eyes to the truth. Thanks god ex traders and their intellectual musings are there to enlighten the rest of us. If only you had the time to make public your literature classic readings then you would be my idol.

    What Jesse wants you to try to give a thought to is: you base all your arguments and logic in GLD and SLV losing metal when they trade cheap to NAV. The arb process and redemption is clear, the mechanics are understood. But step back to the thing that makes this process (thanks again for explaining it to us) possible: cheap metal.

    Would you agree that the “cheap metal” part of the equation can be achieved independently of the physical part?

    The redemption, arb etc… is a consequence of a price discovery done elsewhere. That is why the physical aspect is tight. Because you think there is a delaying physical problem…, right?

    ReplyDelete
  17. This comment has been removed by the author.

    ReplyDelete
  18. Hi Bron,

    Do you really think it was necessary to delete Kid Dynamite’s answer?

    There were some “dick”, “bullshit” words (those words were directed to me and I do not mind, it is OK for me) but apart from that he really tried to elaborate an answer.

    Besides, it was “for free” as he said.

    Thank you

    ReplyDelete
  19. hey Unai -

    Bron didn't delete my reply - i did. I remembered that I'm not in the business of wasting my time helping ungrateful goldtards.

    good luck.

    and remember: the deceit of dawn is darkest before the fall. (cryptic literary quotes are cool - I learned that from Jesse)...

    -KD

    ReplyDelete
  20. LET'S HEAR SOME CRYPTIC LITERARY QUOTES FROM THE CHAMBERLAIN BROTHERS:
    Gold is gone today
    All our gold is going away
    They keep pulling it off every day
    I don't care what others say
    No one ever listens anyway
    Gold is gone today
    (Hey)

    Oh
    The rules have changed today (Hey)
    Gold has a new place to stay (Hey)
    Our gold has flown away (Hey)
    My tears have come and gone (Hey)
    Oh my Lord, Our gold is on the “roam” (Hey)
    It’s got a new home (Hey)
    It’s got a new home (Hey)

    Now the gold has gone (Gold)
    It’s got a new place to run (Gold)
    It’s kilo-melted by the tonne (Gold)
    But we had our fun (Gold)

    We’ve been fractionalized and put aside (Gold)
    We've been papered by a tumbling tide (Gold)
    And our gold has been psychokilocized (Gold)

    (GOLD)
    Now our gold is gone (Gold)
    There are things to realize (Gold)
    Gold is gone today (Gold)
    Gold is gone today (Gold)

    ReplyDelete
  21. Anon: “but why wouldn't they use the much higher premium in the Ag fund to arbitrage?”

    In my chart the profitable arbitrage occurs when the fund trades at a discount. PSLV has not traded at a discount hence there is no arbitrage profits to be had.

    Jesse: “there may be a linkage to a greater market force between the opportunity for an arbitrage profit in PHYS and something else”
    Unai: “is a consequence of a price discovery done elsewhere”

    My article is focused on the fact that redemptions only occur when the fund is in profitable discount to NAV. Why that discount occurs (and disappears) is another topic. Given the closed ended nature of Sprott’s funds on the creation side, their discount/premium to NAV can be due not only to wider factors affecting the spot market but also specific bid and ask depth or lack thereof in the Sprott funds.

    Certainly the two 3 tonne redemptions, and buying of PHYS that necessitated, would have been a factor in the discount receeding in 2014 but also the strength of the gold price may also have brought in new money bidding on PHYS which would have also caused the fund to go back into a premium.

    ReplyDelete
  22. HMMM---BRON, INTERESTING.
    BUT LET'S CHECK WITH TOMMY JAMES.

    HE'S GOT A NEW SONG OUT CALLED "PULLING THE RUG"

    Makin' livings the new easy way
    Takin' and takin' by day by day
    They dig dough and wealth and scamming the goldbug
    Pullin’ the rug (pullin’ the rug)
    Their dog Sam enjoys caviar
    They got tonnes but what we got's ours
    They dig dough and wealth and scamming the goldbug
    Pullin' the rug (pullin' the rug)
    Pullin' the rug (pullin' the rug)

    They feel fine manipulatin’ drinking fine wines
    They're gonna take them every time
    Holding that resistance line
    Pullin' the rug (pullin' the rug)
    Pullin' the rug (pullin' the rug)

    Loving free cash and big bonus payments
    There’s the London Fix Excited when they get near it
    Diggin' the dough and the
    wealth and scamming the goldbug
    Pullin' the rug (pullin' the rug)
    Pullin' the rug (pullin' the rug)

    They feel fine suppressing every time
    Collecting on moves as small as a dime
    Sayin' "everything is mine"
    Pullin' the rug (pullin' the rug)
    Pullin' the rug (pullin' the rug)


    ReplyDelete
  23. FOMC NEXT WEEK--SHE-PUPPET'S FIRST PRESS CONFERENCE--WONDER WHAT SHE'S THINKING?

    WELL---There was a song about it:

    "SUPERFINE FIB"
    The world’s been walking on a tight rope
    Ever since I started printing paper
    But I'm swaying with my taper
    From my left to my right
    All the Fed's pretending
    My house of cards can’t fall
    So I never stop the ponzi at all

    Sometimes I get weary
    At the fed in a faceless crowd
    We still hear me
    Never “Yellen” loud

    I'm searching for a superfine fib
    In my lonely mind
    I'm searching for a superfine fib
    In my lonely mind

    I've been staring out my window
    Ever since GLD began to drain
    And gold drops as the market tops
    On my computer screen

    I'm so tired of waiting, waiting
    For the gold to come down
    Gonna button up my coat
    And head downtown

    Sometimes I get weary
    Lying to the faceless crowd
    They still hear me
    But I’m just a clown

    I'm searching for a superfine fib
    From my empty mind
    I'm searching for a superfine fib
    I hope they’re kind

    Sometimes I get weary
    Combed my hair but I’m still ugly
    They still hear me
    Even when I sound nutty

    I'm searching for a superfine fib
    I'm searching for a superfine fib
    I hope I’ll find
    Some words from my tiny mind


    ReplyDelete