“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 iSh