Palm Beach’s “Better Than Bullion: How to Make 550% From the ‘Paper’ Silver Crisis.”

Looking into the silver tease from Tim Mittelstaedt for the Palm Beach Letter about "How 'Proclamation 2039' Could Make You Rich…"

By Travis Johnson, Stock Gumshoe, November 7, 2013

“Shocking Investigation Reveals:

“How a tiny handful of institutions (including a branch of the Chinese government) are creating the greatest resource opportunity in over 34 years…

“Why thousands of unprepared investors could lose everything…

“Three specific ways to make serious gains as the price of this substance jumps 550% over the next year.”

That’s how today’s ad from the Palm Beach Letter folks caught my attention.

They’re talking about the mysterious “Substance 47” … which, as they do eventually go on to reveal, is silver, which has the atomic number 47. As you would know if you had memorized the periodic table like a good student — always handy for a stock sleuth, the publishers love to use these “secret” numbers in their pitches, whether it’s the “fourth element” pitch from Byron King for Beryllium or the “third element” lithium stories touted by the Money Map folks.

And to warn you up front, even the fully believable stories about the ridiculousness of the “paper” silver market manipulation, the Chinese demand, and the critical nature of silver as an industrial element don’t mean that silver is going to double this year. Silver’s price has pretty clearly been manipulated in the past at least, and is probably being manipulated now, but that doesn’t mean that any advisor can predict the moment when that manipulation stops … or, despite the attractiveness and logic of the story, the direction the metal might move if and when a “free market” in real, physical silver emerges to crush the highly levered “paper market.”

I say that not to tell you that silver will go down (or up), or to say that this pitch is wrong … just to share with you that we’ve seen essentially the same pitch for several years now from different newsletters. Tom Dyson runs Common Sense Publishing, which is putting this tease out, and his old colleague from when he worked at Stansberry a few years back, Matt Badiali, had much the same argument as he pitched the inevitable climb of “element 107” two years ago (107 is the atomic weight of silver, 47 is the atomic number) … and silver is down about 25% from when that pitch was made. So even if the argument that silver must eventually climb is right, and it may well be, I have a hard time believing that anyone can very accurately predict when.

But I’ve done my “but wait” bit before even really telling you the sexy part — my apologies. What is the pitch?

“… you may be wondering why you’d want to buy anything related to silver. Especially if, like many investors, you’re worried about the price collapse earlier this year.

“Well, it all fits neatly into China’s plan. The fear that so many investors are feeling right now is what creates this opportunity. It’s why China—and you—can grab silver at dirt-cheap prices…

“Before prices launch 4… 5… even 6 times higher.

“The Chinese have patiently waited for this opportunity for decades. They know that silver is the ultimate protection against financial crisis. In the 1930s, silver helped China avoid the worst effects of the Great Depression. Even the Communists couldn’t erase this deep-seated respect for the metal… despite their best efforts to ban private ownership.

“Now, 80 years later, the Chinese once again must rely on silver to avoid economic collapse.

“Xia Bin, an advisor to the People’s Bank of China, spilled details to the Economic Information Daily. China has publicly announced that its Central Bank is adding silver to its ‘official’ reserves….

“China is the catalyst that will tear open one corner of the silver market… possibly triggering a failure on one of the world’s largest futures exchanges.”

And yes, that “corner of the silver market” is the futures market — specifically, the COMEX silver futures market. The basic story is probably one you’ve heard before, and it’s true, that the futures market trades far, far, far more “paper” silver than is actually available for delivery — the assumption being, as usual, that those who are hedging and those who are speculating will effectively cancel each other out and roll futures contracts forward to future dates rather than accept (or demand) delivery of the actual metal. As with fractional reserve banking like we have in the US, the futures exchange holds only a portion of the physical silver that’s being traded on the exchange at any given time.

Which means that there could be the futures market equivalent of a “run on the bank” — with more contract holders demanding physical silver than there is physical silver in the COMEX vaults, and therefore, the theory goes, the price of silver will shoot up and the people who actually need silver drive prices up to lock up their supplies.

[The “Proclamation 2039” bit, by the way, is about how the restrictions set by FDR on physical silver trading to prevent hoarding, long since overturned, sent the physical markets to Europe and led to the “paper market” or futures market being the dominant way that Americans buy, sell and trade “silver.” Not sure how it worked in practice, since all US coins except nickels and pennies were 90% silver back then (or gold, of course, though the gold ones didn’t circulate much even before they were confiscated that same year to rejigger the gold standard). You can see the text of the proclamation here if you’re curious, the gold part of it was overturned in 1973 and the silver part of it was not particularly significant to the markets in the following years but was formally overturned in the early 1980s. I don’t know whether that proclamation and the underlying uncertainty about ownership led to the “paper” futures market being dominant or not, but I suppose it makes some logical sense.]

The silver market has been manipulated before, but that was a bit different — that was the Hunt Brothers trying to “corner the market” on the shiny stuff in the late 1970s (culminating in a silver crash in 1980 after Fed Chairman Volcker “whipped inflation” and the COMEX changed its trading rules), even going so far as to build a mine as they where trying to “own” the futures market for silver (that was what is now the Prairie Creek mine, a nice cautionary tale when you consider mining stocks — it was discovered in 1928 and still hasn’t become a real producing mine, partly because of the litigation and price crash caused by the Hunt Brothers). The Hunt brothers started this whole silver mania in the 1970s simply because they were trying to protect their wealth with hard assets in the face of a rapidly inflating dollar, by the way … and it was nothing magical about silver per se, they largely chose silver because it was illegal, in the early days when they started this accumulation, to own gold (that changed in 1975).

But the same thing did end up happening back in 1980, essentially — more and more physical silver was demanded, and the futures market was overwhelmed with demand. The price of silver did shoot up when that happened, but it also collapsed when COMEX changed the leverage rules and controlled the frenzied trading over those few days when the price spiked and collapsed, and I think the Hunt Brothers ended up declaring bankruptcy in 1988 after years of litigation (including with some silver miners), eventually seeing their fortune go from roughly $5 billion to $1 billion in less than a decade. Another cautionary tale that even really, really wealthy people can lose very badly when they get a big idea wrong, or when the trading rules are changed and they’re highly levered — don’t assume that you’re smart enough to be certain about what the market will do, or at least don’t assume so much that you’re willing to use margin to act on that certainty.

I seem to have gotten off track again. Where were we?

Oh, right — silver is going up, says Tim Mittelstaedt, one of the Palm Beach Letter researchers. Which means you have a big opportunity to get rich.

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And it’s going to go up because the central bankers are fearing deflation and (globally) pushing for inflation that he says could turn into hyperinflation, and because the Chinese are working to have all that physical silver essentially moved to the East with physical purchases and the launch of their own exchanges … here’s how he puts it:

“See, today’s central bankers have spent most of their lives studying the deflations of the Great Depression and Japan in the 1990s. They are determined to keep prices from falling… even if it risks a nasty inflation (or even hyperinflation) down the road.

“So unquestionably, the stage is set for higher silver prices.

“And while the vast majority of Americans are oblivious to the danger, China is taking proactive measures to secure their silver stockpile. They’re launching new exchanges—and expanding old ones—to handle the demand.

“The Chinese Gold and Silver Society will begin trading in physical silver in Hong Kong.

“And Singapore (an ethnically Chinese city-state) just launched a physical precious metals exchange—with real silver trading hands—to capture growing Chinese demand. As I mentioned, demand for silver bars is up 37 times in just three years…

“Make no mistake: America’s silver will flow to the East.

“And if what I’m claiming is true…

“That we’re on the cusp of the biggest run on silver since the 1970s… one that will generate billions for prepared investors…”

But that’s enough of the “big picture” story on silver — if you think the “paper” silver market (like futures contracts, or like the futures-based iShares ETF SLV) is not trustworthy, what do you buy? Do you want to fill your house up with silver? It gets kind of heavy and becomes a security risk.

Here’s when they start teasing some specific ideas:

“Sure, you could just buy silver bullion and lock it away. In times of crisis, it’s prudent to have a few coins on hand.

“But that’s not the most profitable—or convenient—way to play this historic move…

“For one thing, silver bullion is bulky. You have to find a place to hide it. Storage fees and insurance could eat away at your bottom line as well…

“But what if I told you there was a way to buy a stake in real, tangible silver (and even gold) as easily as you buy a stock? Better yet, what if you could buy it at a discount… like buying $1.00 worth of solid silver for 95 cents? With no out-of-pocket storage fees or insurance premiums, either…

“That’s precisely what my research team and I have found. We’ve put all the details into a new research report. We’ve named it ‘Better Than Bullion: How to Make 550% From the ‘Paper’ Silver Crisis.'”

OK, so that sounds potentially interesting — discounted (most physical silver carries pretty hefty premiums these days, almost 10% over melt value even for “junk silver” coins), and not stored? So what is it?

More hints:

“… you’ll learn how to access this discounted silver for as little as $15. And how you can buy it from any regular brokerage account.

“Keep in mind, this is not some risky mining company… or even one of the Exchange Traded Funds that have become popular in recent years….

“We’ve found a better alternative. A way to buy a stake in real silver, untethered to the paper markets. It’s as easy as buying a stock or any ETF. But this unique trust holds silver in a secure, audited facility that’s outside the U.S. banking system. So U.S. residents can get built-in diversification, as easy as clicking a mouse….”

So what’s that?

Well, there are really two things it could be — the direct play on silver (and only silver) that’s promised to be held in a non-US vault and not managed by a bank is probably the Sprott Physical Silver Trust (PSLV), which trades like an exchange traded fund. But that’s not trading at a discount and isn’t anywhere near $15, so I suspect that they’re hinting at a couple things — maybe both the PSLV trust and another trust that trades on the exchange, the Central Fund of Canada (CEF).

The Sprott Physical Silver Trust currently trades at almost a 3% premium to net asset value, so you can’t say you’re getting that at a discount, but it does hold unencumbered, allocated silver in a Canadian non-bank vault and it’s run by Eric Sprott’s firm (Sprott has been evangelizing for silver for a while, and also talks about the unsustainable nature of the “paper” market). The shares were frantically traded early in their existence (early 2011) and for a brief while traded at a huge premium to asset value, but over the last year or so it has tracked the silver (COMEX silver) price very closely, usually at a premium similar to what it carries today.

There is also a promise of redemption of PSLV trust units for real silver, though that will come at a substantial cost for processing and is available only for those holding massive positions (10 London “good delivery” bars, so roughly 10,000 ounces or $200,000+ of PSLV shares). And of course, you might want to bring a friend to help you pick it up — that’s about 700 pounds of silver.

And the Central Fund of Canada (CEF) is something of an anachronism these days, a closed-end fund that’s a holdover from the years when there wasn’t really an easy, exchange-traded way to get precious metals exposure. And it does trade at just under $15 a share. And it is at a discount to asset value at the moment, currently that discount is about 4.5% (you can see each day’s NAV calculations here). Like PSLV, this is real silver and gold (it’s generally about 50/50 silver and gold, though I think it’s more like 55/45 gold weighted at the moment).

In recent years, the same folks who run the Central Fund of Canada also came up with specific trusts for both gold and silver, so if you don’t want to own both there’s also the Silver Bullion Trust (SBT in Canada, SVRZF on the US pink sheets) and the Central GoldTrust (GTU in both NY and Canada). Both are also trading at a discount to NAV, though the Silver Bullion Trust trades at a more dramatic discount of about 8.5% at the moment.

I haven’t ever owned any of those four (PSLV, CEF, SBT or GTU), but they are more direct (without futures contracts or derivatives, and without unallocated ownership of bullion) than the big precious metals ETFs like SLV and GLD. They are also a bit more expensive since they’re far smaller and have administrative and storage costs, differences that would be less significant if you really think the futures market will collapse because of huge physical demand and these physical holders end up in the catbird’s seat with no reliance on the future exchanges. I have no idea how that will all work out.

Do note, also, that all four of those are almost certain to be taxed for US investors as passive foreign investment corporations — that’s not necessarily the end of the world, but it requires decisionmaking and form filing and may impact the taxes you owe over time, I won’t try to explain it here (I’d make a fool of myself, and probably steer you wrong), but the Wikipedia explanation is here and the IRS’ instructions are here.

And he does also suggest a physical silver investment, the “hold in your hand” stuff that many investors want …

“And if you want to have real silver on hand—a good idea, as I said—we’ll show you a way to buy hold-in-your-hand silver that’s much more valuable than ordinary bullion. If the price of silver rises, this little-known play could rise 10-20 times higher than the actual metal.

“In fact, you could make a lot of money even if silver goes nowhere. In 1986, this investment fetched over $1,000 per ounce… even though ordinary silver was trading for just $6! All told, this play rose nearly 1,000% during the last bull market.

“I expect it to do even better this time. While the price of silver is up nearly five times over the past decade, this investment is still incredibly cheap. It’s trading at an 82% discount to its high.”

This is, almost certainly, the Morgan Silver Dollar — the most popular, by far, of the US silver dollars among investors and coin collectors. There are gajillions of them in collector circulation in any condition you might want (no, “gajillions” is not a technical collector term), and they are almost always recommended as a prime investment by Van Simmons of David Hall Rare Coins and PCGS (the coin grading service) — these are the same coins recommended by Matt Badiali for a Stansberry newsletter a couple years ago, and other folks from Stansberry and other publishers have interviewed Simmons and recommended these in the past as well.

And if you’re talking about being at a 82% discount to the high, you’re not talking about the regular old “junk” Morgan Dollars, the ones that circulated for decades and are so worn they’re almost unrecognizable — you’re talking about the graded and slabbed Morgan Dollars that trade for multiples of their silver value. Not unlike the oft-repeated recommendation from Steve Sjuggerud to buy the old St. Gaudens Double Eagle gold goins in MS-63 or 64 because it might again trade at a more dramatically huge premium to the gold content someday.

So I’ll guess that this is the Morgan Dollar in MS-63 or so, the higher the number the higher the cost and the better the quality — from big dealers these will cost probably about $55-60 each at MS-63, up to $75 or so at MS-64 and probably $200 at the much rarer MS-65. I’m no collectibles expert and I have no idea whether or not these coins will rise dramatically in value and again trade at a much higher premium to the silver price, as some of them have at times in the past. Each coin has a bit less than three quarters of an ounce of silver (the coinflation site gives the current melt value of about $16.75), so that’s the “hard asset” part — I don’t know where silver’s going, or if rises in the silver price will be accompanied by rising collector demand for these coins, but do keep in mind if you buy these kinds of collectibles that at least 2/3 of your investment is in the collectible value of the coin, not in the physical silver.

If you want something similar that has historically not been quite as popular among collectors (partly because of volume and age, partly because of physical attractiveness, I guess) and isn’t traded in the same volume, there’s also the Peace Dollar, celebrating the peace after WWI — that one in similar quality might trade for 10-15% less than the Morgan Dollars.

Sound enticing? Like the ring of any of these silver investments, or think that we’re now at a good point for silver investing? Let us know with a comment below.

P.S. Looking for the “The ‘Underground Wealth’ Account: How to Fund Your Own Worry-Free, 100% Tax-Free Retirement?”

That was another special report teased by this ad, but the “account” it’s actually talking about is still the same insurance policy that they’ve been teasing for a while now as the “770 Account” — a whole life insurance policy that pays dividends, with a paid-up-additions rider. It’s the same basic idea that’s pitched as “bank on yourself” or “infinite banking” by a number of authors, insurance agents, and financial hucksters (that doesn’t mean it’s necessarily bad, just that some over-the-top people like to promote it as their secret).

My impression as a non-expert is that it may well work out fine if you’re in OK financial shape and have good discipline (ie, you’re looking for a possibly safer investment with tax and estate planning advantages, not a “save your retirement” investment). It’s probably best thought of as a way to get better rates on your savings if you’re already doing well, a policy like this can be a tough commitment for small investors or savers who might need the money in the next decade … and it’s an industry historically fraught with high fees and hard-to-compare products so it’s hard to say it’s always bad or always good. Research carefully with an adviser you trust if you want to follow this path. I wrote about the first iteration of this, the “770 Account,” here if you want to see the long discussion or the other details.

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