Are “Silver Strikes” 36X Better than Dividends?

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Almost every ad that refers to options in some oblique and secret way likes to throw in the fact that this is now a sector that is “regulated by the U.S. Government” … but it it “used to be illegal.”

Which makes it sound both more exciting, and safer, than it is really is for most individual investors.

So yes, Christian DeHaemer’s new ad, for his Options Trading Pit (that’s the newsletter that used to be helmed by Ian Cooper) is touting some sort of silver-related options trade.

I have written about DeHaemer’s teases many times over the years, for several different newsletters he has run, but he’s never particularly been touted as an “options trader” guy — he’s known to me as a frontier markets risk investor, someone who looks for the big potential, high risk stocks that we’re not supposed to have heard of. And he has certainly picked some doozies over the years, including Africa Oil back in 2011 before they struck oil in Kenya on their first try and shot up 500% (it’s come back down a bit since, I own those shares personally).

So now he’s pitching an options trading idea that he calls “Silver Strikes.” What is it?

Well, he hints around that he’s got three silver strikes to recommend … but doesn’t actually provide any clues about what they are, specifically — other than the fact that they each trade for around a dollar.

So I probably can’t name the specific trade he’s touting, but I can give you the general idea and some possible examples.

DeHaemer calls his “system” for finding picks the “hammer, trigger, and spark” system — that basically means a stock has been “hammered” down, the stock recovers a bit in a “trigger” move but then declines again after that, and then something sets off a “spark” to send the stock back past that trigger point and higher. Which looks good when he shows the charts of a few stocks this has worked for — but you can, of course, come up with a historical chart that shows anything you want it to show.

He also clearly thinks silver is going to shoot higher in 2013 — a common assertion among the investing punditocracy and a sentiment I’ve heard trumpeted loudly from most of the newsletter families over the last three or four months (particularly for Stansberry and the rest of the Agoraplex, which also includes DeHaemer’s employer Angel Publishing). Not everyone’s on board with Eric Sprott in predicting $100 silver, but there are a lot of folks who think silver is going to snap higher — whether because the “manipulation” of the silver futures markets will be unwound or just because investor demand has ramped so much higher over the last two years and recovering industrial demand will mean supply just can’t keep pace.

(The manipulation story comes from the assertion that JP Morgan and other banks are shorting heavily to keep silver prices down, perhaps in collusion with the government or, depending on who you ask, the Trilateral Commission or the Illuminati or whatever other bogeyman you can imagine — yes, I know at least part of that story of futures manipulation is likely to be true, I just don’t know if there’s really a deep conspiracy or if said manipulation will end or has ended).

Here’s DeHaemer’s take on the shiny stuff:

“As Silver Demand Blows Through the Roof…
‘Silver Strikes’ Gains Will Be Explosive

“You don’t have to be tuned in to the latest financial news to understand that silver demand is absolutely off the charts.

“Couple that with the fact that supply is historically low, and you find yourself in a situation where silver prices can do nothing but explode.”

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And you can easily build a case for this story of outsize silver demand as the calendar turned to 2013 — investors were snapping up silver coins faster than the mint could make them, so the U.S. Mint did briefly have to halt and ration the sales of American Eagle coins (those are the basic 1 oz bullion coins that the mint is required by law to mint and sell — not the fancier collectible versions that they often have to halt sale of if bullion coin demand is high, since both collectible and bullion coins use the same silver “blanks”). January 2013 set a new record for silver coin sales by the mint, and that’s after several years during which silver coin demand has been far, far higher than we’ve seen for decades. That rising demand coincided with the move in the silver price from the $10-15 range up to the $30+ range over the last five years or so — though the investor interest really spiked in the Spring of 2011, when silver shot up to almost $50 for a very brief few moments. Silver and gold have performed similarly over the last five years, and their prices have reacted to the same stimuli most of the time, but silver has been far, far more volatile.

And whenever you have the potential for high volatility, you have folks looking at options as a way to capitalize on those big moves.

So we’re told that DeHaemer’s “alerts” are triggering buys that could get you 35X your money by June on these “silvers strikes.” Here’s how they put it:

“In the case of these now-legal ‘Silver Strikes,’ his alerts have already been going off like crazy.

“You may know there was a massive silver sell-off in 2009 during the market correction… Well, that’s the hammer.

“You might also be abreast of the fact that silver started moving up in 2010 due to QE1 and 2. That was the trigger.

“But here’s where the real action begins…

“As I showed you earlier, silver demand is reaching critical levels. Production is slowing due to this increased demand.

“Things are hitting a fevered pitch, and the spark is set to send silver to unprecedented levels — giving savvy investors access to potential paydays the likes of which they’ve only ever read about in financial success books.”

I have no idea whether there’s really a “spark” in the silver markets right now — like gold, silver recently had what some folks call a “death cross” on their charts, when the 50-day moving average dips below the 200-day moving average, and both of those moving averages are declining for silver, so a lot of technicians are nervous about that. I’m not a technician and I’m not particularly worried about gold or silver in the long run (I expect them to hold their value over time against declining currencies, which is why I hold physical gold and silver as part of my savings), but that doesn’t necessarily mean I’m putting on a big options trade to bet that silver is going to climb substantially higher over the next three months.

But if you wanted to do so, what would you do? Well, DeHaemer says he has three recommended “Silver Strikes” trades that provide leverage. As we’ve said, these are options — here’s how he describes them:

“But instead of scrambling around with everyone else, trying to hoard physical silver, you could instead take advantage of “Silver Strikes.”

“Not only are there limitless ‘Silver Strikes’ to take advantage of; lots of them cost right around $1. That’s right. For just a buck, you can take advantage of this silver bonanza without paying the hefty premiums placed on silver coins and bullion.

“That’s because as prices shift in the silver market, $1 ‘Silver Strikes’ move at an exponentially higher rate.”

I don’t know if there’s something magical in the $1 options prices, other than that it sounds good — perhaps they’re just taking their cue from the extremely popular “Silver Shots” teaser at that their colleagues at Insiders Strategy Group (then Taipan) ran a few years ago that similarly touted $1 several-month-out options trades on the silver ETF.

But we don’t receive any other clues as to which “silver strikes” DeHaemer is pitching. So I guess he doesn’t want to dance with the Thinkolator … which means we’ll just have to provide a couple guesses to give you an idea of how it might work.

If you’re an active options trader and know the mechanics of options trading, you can just skip to the end and share your thoughts with a comment about where silver might be going, or how you’d want to play that trend in the stock or options markets — I’m going to explain the basics of an options trade such as they’re hinting at with the “Silver Strikes.”

First, I’ll assume that he’s pitching options on an ETF — that gives you the best chance of tracking the silver price pretty well, or, in the case of the silver miners ETF, of getting some leverage to silver without much single-mine risk. And there is always mine-specific risk — miners have a tendency to hit cost overruns or miss their schedule about as often as I’m late getting the kids out of the house in the morning. Which is to say, “enough to be embarrassing.”

It sounds like the pitch he’s making is a very basic one, just buying call options to speculate that the underlying stock or ETF will rise in value. We’ll assume that the most liquid silver ETF, SLV, is one of his targets.

SLV is trading at almost exactly $28 right now, and it does have options contracts available for June that expire on June 21.

A call option gives you the right (but not the obligation) to buy a security anytime before the option contract expires, at the strike price set in the contract. Call options are priced by the share, so a $1 call option would mean you’re paying $1 per share for that option to buy the stock, but each standard options contract that trades is 100 shares, so when you talk about a $1 option you’re actually talking about a option contract that’s currently changing hands at $100 and that gives the right to buy 100 shares at the contracted price. Most of the options you might consider to be potential “silver strikes” won’t pay dividends, but options contracts are generally NOT adjusted for dividend payments unless the dividend is particularly large or special (a big 20% one-time dividend or a spinoff or split would almost certainly lead to the options contract being adjusted to compensate, normal payments on a typical 1-8% yielding stock don’t impact the options contracts, part of the reason why high-yielding picks often have relatively inexpensive options).

If we go out to June for SLV options, there are lots of pretty liquid options contracts, with at least 1,000 contracts of open interest, and in increments of 50 cents per share … so there’s a lot of flexibility. One possibility would be the SLV June 29 call options, which are priced at just under a dollar.

The SLV $29 options are at 90 cents right now, which would mean that you’re effectively betting that SLV will rise to $30 ($29 plus 90 cents, plus commissions) between now and June 21 for you to break even. SLV tracks the price of silver quite precisely, it’s been roughly a dollar below silver recently (to account for the expenses of the fund … and perhaps, to a very limited degree, the preference some investors have for more of a “guaranteed physical silver” ETF), so you’re betting silver goes to $31 an ounce or above.

The possible scenarios? Well, if the SLV ETF stays about where it is for the next three and a half months your options contract gradually becomes worthless — the right to buy SLV for $29 means nothing when you can buy it on the open market at $28, and the time value (the right to buy it not just today, but until late June) declines as the amount of time left before expiration declines. If SLV is below $29 when your options contract expires, your options contract is worth nothing — that doesn’t mean you mightn’t have had the opportunity to sell it inbetween now and the expiration date, perhaps at a better price depending on what happens to SLV, but if you hold to expiration the price has to be above $29 on June 21 for the options contract to have any value.

If the underlying SLV ETF is above $29 and you don’t sell the option, your broker in many cases (check with them) will automatically exercise the option for you if you have the money to buy the stock at $29, so do pay attention if you trade options — you might end up owning the stock even if you hadn’t wanted to. You can always sell the options contract, which should be easy if it’s in the money, but with most brokers you have to proactively do so.

In the short term, the options contract price will react very quickly to relatively small swings in the price of silver — so if SLV falls to $26.50 tomorrow, a drop of 4-5% or so, the bids for that options contract would probably drop to 40 cents or so, losing half their value or more. You can’t easily use any “stop loss” techniques on very volatile, near-the-money options like these, even if they’re pretty liquid as the SLV options are — they’re just too bouncy.

So if the SLV shares are below $29 and are generally lackluster over the next few months, this turns into a stinky trade. But the point of making this trade is that you think silver is about to spike in value — so what happens if you’re right?

Well, that’s when you get the adrenaline rush of a hugely profitable trade.

If silver goes back to the spiking highs it hit in 2011, let’s say the shares of SLV hit $45. You have the right to buy SLV at $29, so suddenly that right — which you paid 90 cents for — is worth at least $15. That’s a gain of 1,500% or so, and if you’re like me getting a gain like that once every couple years is enough excitement to keep you dabbling in the options markets, where you will lose most of the time on speculative bets like this.

SLV has mostly been in a range of roughly $26-33 over the past year, so let’s say it just goes to $33 again and is around that price at expiration — that would mean your options contract is now worth about $4, and you paid 90 cents, so that’s a nice 300% gain. Also probably enough to get you excited.

That’s the basic premise then, that you think silver will take a bit run in the next 15 weeks or so, and that you’re willing to bet on that run happening before June 21. Being right about the fact that silver is in demand and undervalued and a good store of value and a bulwark against potential inflation and an increasingly in-demand industrial metal isn’t enough … that can all be true, and it can be realized as silver climbs over the next 18 months to reflect those big picture things, but if you’re not pretty precisely correct about when that silver price rises you could easily be right about the long-term potential but still lose all your money by betting that the potential is realized within a specific time frame. As you might imagine, getting more time for your options bet costs more money — so the same option for January 2014 would cost you a bit over $2, for example, and going further out to January 2015 would cost you more than $3.50.

The same basic picture will play out in any of the likely candidates for “silver strikes”, though the premium will likely be larger for individual mining stocks because they’re more volatile. Betting on a 10% rise in Silver Wheaton (SLW), the silver streaming company, would cost you about $1.15 (that’s the June $34 SLW call, which also has a decent amount of liquidity for small speculators) — that’s appealing because SLW tends to be a leveraged play on silver, usually moving in sympathy with the silver price but with more volatility than SLV.

Similarly, another “Silver Strike” potential might be the silver miners ETF (SIL) — that one actually has very little options trading volume, so it’s probably not a candidate for DeHaemer’s subscribers because they’d run the contracts up in price just by breathing on them, but speculating that this ETF of larger silver mining stocks would go up from $18 to $20 by July (different contract expiration month) would cost you about 75 cents. If you want to get into specific silver mining stocks, a few of the larger ones that tend to have at least some options trading liquidity are Coeur d’Alene Mines (CDE), Pan American Silver (PAAS), Hecla Mining (HM) or First Majestic Silver (AG).

Likewise, there are other silver-linked ETFs where you can rummage around looking for a silver gem of an options contract to dabble in — there’s the leveraged ETF that’s supposed to move twice as much as silver on any given day, ProShares Ultra Silver (AGQ), for example.

So there you have it — no clues for the Thinkolator about specifically which picks DeHaemer is targeting for his “Silver Strike” short term options trades to benefit from silver rising quickly during the Spring. My guesses, and these are just guesses, would be that he’s picking the SLV option I noted above (or one close to it, like $28.50), and the Silver Wheaton June calls in the $33-36 range, and the Pan American Silver July $16 calls.

But those are absolutely wild guesses — the point is, yes, you can speculate on silver rising more than 10% in the next few months, you can do so pretty easily and with a relatively small cash outlay, and if you’re right you can generate some very quick profits on these kinds of leveraged speculations. If you’re wrong, of course, the odds are that you’d lose most or all of your investment — your specific bet rests on a very specific point in time and a specific price, so there’s not a lot of middle ground where you would break even or generate a small loss or gain. Except it’s not really right to say that speculating on the move of a commodity over a 15-week period is an “investment,” so we’ll say that you’d lose most or all of your bet. The nice thing about buying options (as opposed to selling them) is that you know up front exactly how much you can lose … you can lose all of the money you spent to buy the options contract, but no more.

So … what do you think? Will silver be spiking up over the next three months? Six months? Two years? Will we be retesting those all time highs near $50, or going back to the teens? I accumulate a little bit of silver and gold every month as part of my savings plan, and I do have some mining exposure, particularly through gold royalty and streaming companies that I consider to be my long-term gold-levered equity holdings, but I don’t have any idea what gold or silver will do between now and the summer.

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27 Responses to Are “Silver Strikes” 36X Better than Dividends?


  1. When you look at the spread between gold and silver and what it has been in history there is only one way silver can go and that’s up. I have purchasing Fortuna silver (FSM) for a few months now and have seen it go up a nice value this week. It will only go one way and that’s up. If it goes down I will buy more.

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    • I do see the gold/silver ratio bandied about quite a lot — I personally think that ratio probably has no real “right” number, and would really hesitate to use the pre-WWII or pre-1960s averages, since gold and silver were active government-managed currencies before then. Since 1965, when we took silver out of our money, the gold/silver ratio has ranged from about 20-100. Right now it’s still on the high side around 50, but though I do think hard assets are important I don’t have much faith that the gold/silver ratio means anything — particularly over shorter time periods, like less than a decade.

      That’s just my opinion, of course, I know quite a few smart people do think the gold/silver ratio is important.

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      • Thank You Travis, another job well done. See it as you do: our Federal Reserve Notes (otherwise known as U.S. Dollars) are being watered down. Hard Assets, like Precious Metals, cannot be watered down so easily, or at all. Precious Metals have additional advantages such as compactness (cannot place farmland in a purse or a pocket) for transport and safe keeping which is a part of the reason they have been money for thousands of years. They are stable, do not tarnish much or at all. Pretty bright colors too :-) Precious Metals, over time (especially these heavier watering down times) will hold purchasing power better (to much better) than our poor watered down currency (otherwise known as ‘Dollars’). The timing part, vital as it is, is somewhere between very difficult to impossible to determine. We do know, pretty well, the rate of watering down and it is at historically higher levels right now. Like Travis I would not be without some Precious Metal, one way to view it is as insurance against currency decline, or even failure/collapse. Some see it as insurance against “social disintegration” – ugh, we can most certainly hope there is little to none of that! People can get a bit rowdy when they are pretty hungry; I like to listen to Travis’s excellent analysis on good investments in small part because the act of investing in itself helps our economy and lessens the likelihood if the bad things happening. Travis is quite bright with a lot of valuable insight – may these great things never change in him.

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  2. I am surprised you did not mention the possibility of selling out-of-the-money put options. This is less problematic — or risky– (in my opinion) than buying call options, since you make money if the ETF goes up, goes sideways, or even goes down a little (but not below your put strike price). Selling a 25 put in SLV, for instance, might be the way to go.

    Also, options on futures are available, and while those are more costly, it can make for greater profits as silver moves up.
    Selling (to open) futures options is available as well. One $25 put option contract for June silver will get you $1300 (if you sell it) — which you get to keep if silver does not go below $25 at the time of expiration, and the option contract expires worthless.

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  3. Firtsly, Travis let me congratulate you with your briljant stuff you’re pulling off. I am from the Netherlands and ‘read’ a lot of newsletters and even paid fro some of them…mostly waist of money. Here I am getting (nearly) all the info…Thanks again. Well concerning silver I am a big believer it to go up…wishful thinking, maybe, but I hope not, because I am quiete heavy in silver AGQ (indeed) and NUGT. Also heavy leveraged.

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  4. I am thinking he is looking at a silver miners etf and then purchasing way out of the money calls as far out as possible. Actually that wouldn’t be a bad idea right now, any decent spike in the miners and you will do well on the options. I find the hard part is selling once you make a nice profit.

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  5. Why is it that when the gold/silver ration is discussed the talk is always about silver moving up to be in line with the price of gold. Why doesn’t Gold have to move down to align with the current silver price?

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  6. What do you think Gumshoe of the chances of Nokia , in the long run, righting the ship and moving forward again with all it’s new phone products aimed at the BRIC’s & other emerging markets and it’s tie in with Microsoft and Windows 8?

    Thank you in advance,

    Tom Patton

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    • I have a friend who works for them, and wish them the best, but haven’t looked into the details And dont know what their valuation or balance sheet look like. It’s hard to recover from being a commodity phone manufacturer by building (rebuilding) a smart phone business, but it’s possible if the products excite consumers in at least a few major markets.

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  7. Anyone watching Tinka (TKRFF) lately. It’s been rising daily .02 to .06 per day and up .12 today with a volumn of 266,650 which is 3 times the daily volumn. Something’s happening with that, “mountain of silver”….. Plus I’ve noticed copper made a big jump today.

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  8. That historic observation is that over 80% of options expire worthlessly; that situation is probably at work, here. Also, my guess is that because some of the “big money” boys need one more drop in silver to unwind their shorts brings me to conclude that this silver strikes suggestion will be a losing deal.

    My guess is that silver will see $24/ounce before it sees $30/ounce!

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  9. My guess is that the long awaited rally in gold/silver mining stocks has started. Another way to multiply gains in silver and platinum is with USLV, a 3X ETF. Options on USLV would further multiply gains….but I would not choose USLV options if volume is light. SLV would then be a better choice.

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  10. Travis great feedback as usual / on another topic i still am not receiving anything in my inbox / one of your helpers promised to take care of it about 2 weeks ago / this is about my 4th request i would love to have it restored as sometimes i am busy and forget to pull you up online Thanks in advance David c Fisher / indiandave / fisher38

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  11. Options going out to January 2015 is interesting. I believe they may be LEAPS ? A paragraph or two about LEAPS would be nice. They can be purchased in IRA’s but have to be sold before 9 months of expiration.

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  12. Excellent analysis by Travis as usual. I certainly agree that deHaemer is better known for picking obscure stocks in frontier markets (Petro Matad anyone) than he is for options, at least to date. Ian Cooper was a far better options picker in my opinion, anybody know WHY he left Angel publishing or where he ended up?
    I have dabbled in options but certainly do not claim to be an expert and personally prefer LEAPS because in a volatile market you can pick up cheap options where you have a long term objective for a out of favour sector such as precious metals currently, rather than trying to predict the month by month movements with near term options, whether puts or calls.

    The reason I would give for the Gold – Silver ratio possibly narrowing, (even if it never gets back to 16 -1) is that as gold rises on a dollar decline, it will eventually price itself out of the market capabilities of the average investor and they will then turn to what is often referred too as “the poor mans gold” silver being much more practical for day to day commerce.
    As Travis has pointed out, you can make some exciting returns with options providing you monitor them closely and are a good market timer with your potential loss never being more than what you pay for the option. In contrast, a quick sell off of a stock can cost you much more before you can react and takes more up front capital to begin with, so there are pros and cons to consider regarding a choice of stock or options on them.

    My personal preference is to use options on stocks over about $20. to reduce the amount of capital required to achieve my objectives.

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  13. Travis,
    Have seen a lot o hype (teasers) by Mike Ward touting Dr. Kent Moor’s 20 Trillion Dollar Southwestern Australia’s Arkaringa Shale Basin (near Coober Pedy population: 1,695) for Wad’s Publication Money Morning.
    Was wandering if or when your Travis Thinkolater has targeted the two companies that Dr. Moor thinks will be capitalizing on this historic energy find by fracking Australia’s southwestern ground.
    The newsletter is so expensive that one must be cautious to commit to receiving it even with the 90 day money back guarantee refund offer.

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  14. Silver and gold are both fads and substances with intrinsic value. The fad value fluctuates wildly, the intrinsic value not so much. As long as there is room for pitches to fear and greed, there will be gold and silver hucksters. Even a broken clock is right twice a day. If there is anarchy, good luck with your gold, it will not go far.

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  15. Yes, Precious Metals have been fads now for thousands of years :-) Copper too.
    My understanding, please tweak or provide your understanding of the numbers, is that our Federal Govt will take in 2.3 Trillion Dollars this Fiscal Year – needless to say this is a lot of $$$. Expenditures, however, are expected to be 3.6 Trillion. What is more, we have been over One Trillion Dollars in Deficit for the last 4 years and near for a lot further back than this. Result does not require much imagination: we are in uncharted waters, we have never been here before, never in the entire history of our Country have we had such totally massive Public Debt, then there are Trillions in unfunded liabilities. Ratio of Debt to GDP is hitting new records virtually daily. Where is the shortfall, over a Trillion Dollars again this year, come from? Foreigners are lending to us but not that much, our credit cards have been maxed out for a long while now, foreigners are not willing to lend much at these low rates so where is the money coming from? Out of thin air. Chairman Ben and the Federal Reserve, with only one dissenter, is effectively printing money through the sky; tremendous sums daily. He is watering down our currency (U.S. Federal Reserve Notes frequently called ‘Dollars’) – of course it will continue to lose value. Precious Metals cannot be created out of thin air, mining is expensive. Precious metals serve as a store of value and medium of exchange. In order to work/function, a medium of exchange must have value. In order to have value a thing must be at least somewhat rare, beach sand does not make a very good medium of exchange, to bulky for one; yet beach sand has more intrinsic value than money that can be created, digitally ( not even dependent on supplies of green ink and paper for rarity ) for virtually no cost.

    Appreciate all comments, these are vital matters and need to be discussed. U.S. Federal Reserve Notes are our Official U.S. Currency and we only have one economy. Again: Totally Massive Debt being “monitized” which is a twenty dollar word for being watered down. Simple supply and demand of Federal Reserve Notes, most of them digital (in accounts like a bank credit personal checking accounts) means as the number of tangible assets remains more constant and the supply of Fed Reserve Notes increases, prices will continue to go up – the result of a watered down currency as the individual Fed Reserve Notes buy less and less.

    So pleased we are writing about this, it is so central to all of our lives as we all buy food, fuel, and other tangibles. We buy with Fed Reserve Notes.

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  16. De heamer was telling us all that due to some change in the Basle rules of banking Gold was bound to leap in value on the 1st of Jan. ( because it could be counted as 100% of it’s value as security whereas previously only 50% allowable)
    I thought at the time that far from creating a market this would reduce the need for banks to hold gold. In fact, a steady and unsurprising fall in the value of gold , in dollars , at least.
    No further mention of his astute analysis in his newsletters.

    De heamer is a salesman selling dreams, occasionally he is right just like Kent Moors or Tom Bullford ( Avanti shares anyone?) they trumpet their successes, endlessly but mostly they are guessing. The one common denominator is that they take your money, in return for their financial savvy. Pah!
    The Motley Fool does seem to have some credibility, their whole package seems better and they do have a real stable of winners.

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  17. If one believes that SILVER will sometime in the future go up to $100 or even $50 for that matter – would not the cheapest/safest route be to buy a OPTION LEAP CALL ? Expample: A Jan 2015 CALL – strike $30 – at $3.10 (currently) . Should it not move up by then – TRUE – One looses $310, but at that time buy another 2 year out LEAP for another $310 or whatever and continue doing so till it does shoot up. One can call it a cheap inflation insurance policy that can pay out big. We all for the most part have CAR and HOME insurance – so adding another policy that is at a rate that we can affort to lose current $$$ for future protection should not be a big strain.

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  18. The only people who have made money on silver options lately are the ones who bought puts or sold calls.

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