“Treasure of the Sierra Madre”

By Travis Johnson, Stock Gumshoe, September 14, 2007

I’ve had countless readers send me notes about this one, so I thought I should write something … but I regret to inform you that I don’t think it’s possible to be certain of a solution on this one without “cheating” and actually seeing the newsletter.

So that can be the Gumshoe’s challenge to you — this is the first real stumper I’ve had in a while, can you outsleuth the Gumshoe?

But I’m getting ahead of myself. This is a Sara Nunnally teaser, for her Material Profits newsletter at Taipan. We’ve run across her before with the “Wildcatter” version of her newsletter, but I think this is the first one I’ve looked into for the regular newsletter.

And I’m almost certain that you’ve seen this teaser — it has gotten as much play as any other newsletter ad I’ve seen in months. The teaser’s running under two names, the “Treasure of the Sierra Madre” and the “White Knight.”

And of course, as is specified in the teaser, this is all about Silver. Silver has been a pretty impressive investment in recent years, for a while even Warren Buffett held a big ‘ol pile of silver (I don’t think he has much, if any, now). It is both an industrial metal and a precious metal, so it actually has significant demand beyond just investment and decorative/jewelry use … even with the demise of traditional photography, there is still more silver used every year than is mined.

There is also some of the mumbo jumbo in the teaser that we often see about secret government statutes that changed the investing landscape — in this case, she cites that this was “Banned from Wall Street in 1961.”

That part of the teaser is clearly a reference to changes in Mexican law, which forbade direct foreign ownership of silver mining operations (and other things). That was loosened up in the early 1990s, as the teaser states, and now US and Canadian companies can apparently own these mines if they want to. Which makes me think, of course, that this teaser company is probably some foreign silver mine owner in Mexico … or, to be sneaky, perhaps a few of them.

A big part of Nunnally’s argument for silver is one that you’ll see several other advisers make these days: The potential of a short squeeze.

You see, on the main silver exchange — or at least, the main one that is trusted and that is based entirely on actual stored silver, the COMEX — the short position held by large traders has gotten very large this summer. This is just like a short position in a stock, so a bunch of big traders have borrowed silver heavily and sold it short at the high prices we’re seeing now, betting that the price will decline.

But it appears, according to Nunnally and some others, that the short position in silver can’t be sustained — the physical and industrial demand will push against the shorts, making them cover their positions and possibly causing a huge short squeeze (that’s when the shares go up so fast that the short holders, fearful of losing all their money, buy quickly to cover their shorts, which then of course makes the price spike higher, which makes more shorts buy shares to cover, etc. etc.).

Now, let me make it very clear that I have absolutely no idea whether or not this will really happen. I have read in many places that the short position in the COMEX is unsustainable, but I don’t have any particular understanding of that myself and, like the “gold bug” investors who will always come up with an argument for investing in the yellow stuff above all else, there is a dedicated crew of “silver bugs” out there as well … it’s certainly possible that I’ve just been reading their stuff, and that they’re crazy. Or not.

I actually do, personally, have some interest in investing in silver. So I was intrigued to try to figure out what the Material Profits silver play was. And then came the part of the tease that made it nearly impossible for me to guarantee that I could solve it:

She said that you can invest in this with as little as $195.

Now, unless the Taipan copywriters are just yanking my chain, which is always possible, a specific number like that has to mean something. And I can’t figure out for the life of me what it is.

Especially since the teaser also said that this is … “not silver coins, or silver bars, or silver bullion, futures, options, Mexican silver stocks, or even mutual funds or ETFs.”

So … here’s what I think:

If it’s really $195, this must be some combination of stocks in companies that are mining silver in Mexico, taking advantage of the relaxed law, the huge mining infrastructure, and, of course, the massive silver reserves available. Unfortunately, there’s no way I’m going to be able to pinpoint which companies that might be …

but less unfortunately, I’m not sure that I’d want to. There are plenty of great ways to invest in silver, and if what I was really interested in was a way to profit from the big short squeeze and from silver’s physical scarcity, I think I’d probably want to be a touch more conservative, pawn off the mining and operational risk on someone else, and just buy the iShares Silver Trust (SLV). This is an ETF that, like the gold version, is backed up by physical silver in a vault, so it must be pretty exactly correlated to the silver price.

And there’s another reasonably safe and indexed silver investment, too — and I’m surprised that Nunnally didn’t focus on this in her teaser, since Taipan pretty aggressively markets Everbank products (and is paid by Everbank for sending customers their way): The silver CD.

Readers have asked me about these before, and there has certainly been quite a bit of interest in Everbank’s innovative CD products lately. They offer what they call the MarketSafe Silver Bullion CD, which is a CD whose return is tied to the price of silver over a five year period.

Now this is kind of an interesting investment idea, so I thought i’d investigate it in some detail — they are FDIC insured, so you can’t lose your principal as long as you’re willing to hold the CD to maturity (if you cash out after a year, sounds like there’s no guarantee), and you’re protected if Everbank goes under. But this is also an investment that has some very specific footnotes, so I think it’s worth taking a look at these before you leap.

The way I read their literature, the deposit (as long as it’s below the $100,000 FDIC limit) is insured just like any other CD, except it’s insured only for withdrawal on October 30, 2012 (for the CD that becomes available next month). So I’m not sure what guarantee you have, if any, if you want your money back before the five years is up — either because you change your mind about silver’s future, or something else.

And, more interestingly, this is not a continually priced product that tracks the silver index or spot price from the date you buy it — they use ten pricing dates spread over the five years, and the first pricing point is not when you buy the CD in October, it’s in April (after six months) — so if the short squeeze has already happened by then and the shares have shot up, that won’t be reflected in any way in your returns, at least as I read the terms.

The returns are based on the spot price of silver on ten semiannual days over the five year life of the CD. And they’re based on the average of those price points. So if the price goes up and down a few times in the next five years, you might need a math degree to figure out what you think your return should be (and hopefully Everbank will agree with you). I understand it to be set up so that they start with whatever the price of spot silver is in April next year, and then take the next nine six month interval spot prices and average them together. If that average is higher than the spot price next April, then that’s the return you get. If I’m understanding this correctly, that doesn’t really match the overall advance of the price of silver over time (should it actually advance).

Here’s how I see it possibly playing out:

Let’s say the spot price in April is $10/ounce, to keep it simple.

Then the prices over the next nine periods (every six months) are 11, 12, 13, 14, 15, 16, 17, 18, 19. Again, just making these up.

You don’t get the difference between 10 and 19 as your return, as you would expect from most investments that you held through price action like that — you get the difference between 10 and the average of 11 through 19 (which is 15). So while a hypothetical investment in actual silver, or in the SLV ETF, would have returned 90%, the investment in the Everbank CD returns 50%. Again, those are made up numbers just to make a point.

The way I read it, this is a nice idea for some because you at least protect your principal from loss (except for loss due to inflation), but unless you think Silver is going to be on a really steady, constant rise over the next five years … or actually, over the four and a half years beginning with the “Initial Value Date” at the end of April next year, this is not necessarily going to perform anywhere near as well as an investment in actual silver bullion. Then again, if you want to bet on silver but really aren’t sure that you’re correct and don’t like using stop losses or selling declining investments, this is one way to protect yourself on the downside … at some cost of a significant reduction in your possible upside.

To their credit, they do at least show you a chart of hypothetical Silver CD returns from previous years, before such a product existed, and almost all of them would have been very frustrating investments. Me, if I liked the idea of a CD’s protection and also wanted to bet on silver, I might just buy options or futures on the metal or the ETF with a few dollars, and put the rest in a regular ‘ol 5% CD.

The silver investments I’ve looked at personally are Silver Wheaton, which buys silver on contract from other mines where silver is a byproduct of a copper or gold (or something else) mining operation, but doesn’t do any mining themselves, and the aforementioned silver ETF, but I don’t currently own either one and I’m not likely to invest in either of them, or anything else mentioned above, in the very near future.

Best of luck, all, if anyone wants to speculate on the individual miners Nunnally seems to be teasing here, or has an opinion on the Everbank stuff or the Silver ETF, by all means share your thoughts with the rest of us …

——

AND Speaking of shameless plugs and silver, two can play that game: I’ve got good news for you … I carry advertising from Elliott Wave International, the technical analysis folks — and they’re offering you a free week of Commodities forecasts, no credit card required.

From now until September 19 at noon EDT, anyone with a free Club EWI membership gets complete access to EWI’s Daily Futures Junctures and Monthly Futures Junctures. Senior Analyst Jeffrey Kennedy scours the markets to find the best commodity opportunities and serves them up to you on three different time frames at no cost!

A free Club EWI membership is all you need to get access to FreeWeek.

Sign up for FreeWeek now with this link and you’ll be helping me financially and hopefully learning something new, and it costs you nothing. I don’t personally endorse Elliott Wave, but I am trying to learn their system so I can understand it better. If you’ve used this system, please let us know if you are an Elliott Wave expert, opponent, or enthusiast and how it’s worked for you. Thanks!

Leave a Reply

10 Comments on "“Treasure of the Sierra Madre”"

avatar

Anonymous
Guest
0
Anonymous
September 14, 2007 7:07 am

Of course, the silver bugs think this will go to $24/ounce. Why not? I started searching and came up with paramount mining who holds many acres in the sierra madres. Beyond that,your guess is as good as mine. Silver and gold typically run up in tandem,but the huge shorts seem to damper poor silvers rise. Buying a leap(one year expiration on an option contract) on SLW could well pay off if the shorts are forced to buy silver back. This could create a large buying frenzy. GI

Anonymous
Guest
0
Anonymous
September 14, 2007 12:40 pm

As an all-round silverbug (heavily into futures), the one stock I recommend for beginners is SLW. The problem with SLV is that it is considered a “collectible” for tax purposes and not suitible for taxable accounts. SLW has no real execution risk, being just a miller not a miner, and at least in theory has some leverage against the price of silver itself.
As for ultimate price targets, I am fond of saying that I am sure that silver will eventually go to $100 an ounce, I just don’t know what that $100 will buy.

Anonymous
Guest
0
Anonymous
September 14, 2007 5:11 pm

Another stock for silver is Central Fund, (CEF), which is basically a closed end fund, which has assets consisting of bullion, mostly silver, possibly some gold as well. It pays no dividend.

Anonymous
Guest
0
Anonymous
September 14, 2007 6:30 pm

I too believe that Central Fund (CEF-US/CEF.A-CAN) is a good candidate.
They currently hold:
732,716 oz Gold.
36,630,054 oz Silver.
Right around one billion in net assets.
Shares currently in the $9.35 US and $9.50 CDN area.
Shares have traded in the $10.95 area in the last six months.
Maybe there’s a typo, $10.95 vs $195.00 ???
Also, I remember someone else recently recomending CEF for it’s exposure to Silver.
But really in all honesty…
Duh! I DUNNO!

Anonymous
Guest
0
Anonymous
September 14, 2007 6:33 pm

Actually, the teaser says you get a share of any silver appreciation, not all of it.

Engineer79
Guest
0
Engineer79
September 14, 2007 7:19 pm
Bootstrap mining from Special Report: Your best bet to find a silver/gold/copper mining stock worth investing in is to find one with a mine already in production. Here are 3 companies that fit the bill… 1. First Majestic Silver Corp. (FR:TSX-V) They own 6 properties that are producing silver. Market cap of $248 CDN , one-sixth of what this company should be worth. The stock could climb as high as $32.15 CDN. That is a 691% from current prices. 2. Great Panther Resources, Inc. (GPR:TSX) They own 2 properties that are producing silver. Their goal is to produce 12 million… Read more »
Anonymous
Guest
0
Anonymous
September 14, 2007 8:52 pm

I bet its 1000 shares of a $0.195 stock.

Anonymous
Guest
0
Anonymous
September 15, 2007 6:16 am

Elliot waves are another pattern analysis that is described by price action waves against a trending straight line. Typically, the waves come in threes, and the third wave is usually a topping pattern that signals a trend reversal. I HAVE SEEN THEM ON THE FOREX. In my opinion, its not an exact science, but can be useful to predict price action behavior. the problem with all technical analysis theories is they discount fundamental analysis.My trading behavior tries to marry technicals and fundamental analysis with flexibility. I learned this from Barry Lind (LINDWALDOCK), although he is primarily a technician.GI

Anonymous
Guest
0
Anonymous
September 15, 2007 6:53 pm

Please look into these 2 news letter STOCKEGG.com and SHAZAMStocks

Are they pump & Dump types?

Thanks

Ronny Rabe
Guest
0
January 21, 2008 5:08 pm

Hello! Found your blog on yahoo – thanks for the article but i still don\’t get it, Ronny

wpDiscuz