“Silver Hits Critical Levels – U.S. Mint Halts Production of Silver Coins

“New Gov’t-Regulated $1 “Silver Shots” Poised to Skyrocket 12,785%

“Forget about silver coins, ETFs and silver mining stocks. New $1 “silver shots” give you a very real opportunity to turn $10,000 into $1.3 million by year’s end.

“But you must act by June 15, 2009, to ensure maximum gains. Here’s why… “

OK, so first of all we need to start by dispelling one oft-cited myth — the U.S. Mint has not stopped production of silver coins. They are seeing huge demand for the silver American Eagle bullion coin, so they have stopped producing the collectible versions (the “uncirculated” and “proof” versions that the Mint sells from its own website) in order to make sure they can mint enough of the bullion coins to meet demand. That’s because the mint has a mandate from Congress to produce enough bullion coins (both silver and gold) to meet demand every year, but the collectible coins are “optional.” Both silver and gold Eagles in those collector versions (with the “W” stamp from West Point) are on hold now due to high bullion coin demand, as are fractional gold coins (1/2 ounce, 1/4 ounce, etc.). The bullion coins aren’t sold directly by the mint, but they’re easy to buy through dealers or banks.

While we’re talking about halting coin production, by the way, I’d vote for getting rid of the worthless penny first, then stop printing dollar bills so we could force usage of the more efficient dollar coins. Can you believe that the Mint still produces more than five billion pennies a year? That’s a lot of zinc that I’m sure we could find a better use for, and a lot of wasted effort.

But this isn’t about my anti-penny ranting (and what would all the eager collectors lined up for rolls of new Lincoln pennies do with their time?) — this is about investing in silver. And more specifically, it’s about pitching a subscription to Death Cross Trader by Zachary Scheidt. He’d like you to subscribe to his newsletter for $250 (a steep discount, naturally), and in return, he’ll tell you all about what “Silver Shots” are … or, of course, you could just read on and watch the Gumshoe in action as he tries to figure it out for himself.

That second option is free, by the way.

I don’t know much about Death Cross Trader, but the death cross in chart parlance is when the long-term moving average line crosses above the the short-term moving average — which apparently is generally a bad sign. It’s more complicated than that, with other options for interpretation, but that’s the basic shtick. I don’t think this newsletter is particularly focused on “against the market” picks on the short side, though Scheidt is profiled as an options trading expert which would mean he’s likely to use both puts and calls. Or perhaps it’s just a cool name.

So what else do we get in the ad? There’s plenty more about silver — about the CPM Group’s assessment that 97% of the silver ever mined has been consumed (by industrial uses — photography, mirrors, etc.), and plenty more about the huge investor demand.

“And The Wall Street Journal states that in March, sales of Silver Eagles surged more than 9-fold from the previous month… and that investors are clamoring for millions more.

“There simply isn’t enough silver on the planet to meet demand, and “silver hysteria” is sweeping the globe.

“In fact, silver coins with a $1 face value are selling for $31 and higher on eBay.

“And silver collectors are running full-page ads in major newspapers like The Washington Post… offering top dollar to folks willing to part with their family silver. ”

So this dance will probably continue — Silver has moved up and down dramatically in recent years, and as it moves up folks tend to sell their coins and scrap silver, which drives the prices back down a bit. Right now the shiny metal is certainly on a tear, along with gold, and it offers a cheap entry point into investing in precious metals since it’s sort of like the “poor man’s gold” in that a one-ounce coin is very cheap.

And the $31 price is real, though the $1 face value of an American Eagle silver coin is pretty much meaningless, they’re minted for investors and are not circulating currency. Premiums for silver coins, as a percentage, are currently huge compared to gold, though the $31 price is the outlier, for uninformed investors buying on ebay or the Home Shopping Network.

I don’t know if a lot of folks are getting $31 for bullion silver coins right now, but certainly some fools are paying that price. Dealers have plenty of 2009 Silver Eagles available and are selling them for about $2 over spot per coin — doesn’t sound so bad, but that’s still about a 15% premium over the $14 melt value of an ounce of silver (the “spot price” is the value of the actual commodity, an ounce of silver traded in London or New York on the commodities exchanges, and what it’s generally considered that the coin would be worth if melted down).

Gold American Eagles, though obviously far more expensive, often are sold by big dealers for a more reasonable premium these days of just three or four percent. So though you can’t buy the uncirculated or proof coins direct from the mint right now, you can still buy plenty of 2009 or earlier silver Eagles through a dealer — and the supply seems to be met, or close to it, otherwise I imagine the prices would be sailing even higher.

But we’re more excited about the crazy returns teased in this letter, right? So what is this special new way of investing in silver that they call “Silver Shots?”

“If silver crawls back to $150 per ounce-its historical average-then $1 “silver shots” will move to $130 per shot… turning $10,000 into $1.3 million.”

So that’s not bad, right? This is clearly a heavily leveraged play on silver of some kind — after all, even buying silver at $14 and selling it at $150 would provide a huge return, but only a bit over $100,000 from a $10,000 investment, far less than $1.3 million. That extra 10X return (plus!) comes from the leverage of “silver shots.”

And another scenario is provided, which would have Silver at stupendous 20-year highs but is here called the “worst case” scenario …

“… for the sake of being conservative, let’s just say that because of these two events [Obama cutting the deficit and industrial alternatives being discovered], silver only makes it up to $28 per ounce.

“In other words, it doubles from its current level.

“If that happens, $1 “silver shots” will still move to $10…giving you a 10-fold gain.”

OK, so we’re talking about something that goes up with Silver almost dollar for dollar, with significant leverage, and that you can buy for about $1 a share but would be worth $130 if Silver hits $150, and $10 if Silver hits $28.

So what can that be?

Well, it’s possible that it’s something a bit more obscure than I’m imagining, but I’d say that the easiest way to get these numbers is by …

Buying call options on the iShares Silver Trust exchange traded fund (SLV).

The iShares Silver Trust, for those who don’t know, is an ETF that buys physical silver and holds it in a vault (along with, I think, some more complex financial transactions to try to closely match silver’s moves on a daily basis — not sure of the specifics), and trades actively on the market at a price that usually very closely reflects the price of an ounce of silver per share of the ETF — so on Friday SLV closed at $14.50 at a time when silver traded on the Comex was going for about $14.70. They use the London Fix price to set the Net Asset Value of this pool of silver, minus expenses, so it’s usually slightly lower than the current silver price, but moves more or less perfectly along with silver.

And you can trade options on SLV just as you can with many stocks and ETFs — so if you wanted to buy exposure to a hundred ounces of silver, you could do so by buying one call option contract on SLV. Since the ad often teases an “end of the year” timeframe, let’s look at the long-dated call options.

SLV has an option string available for January 2010, so if we look at that we can see that if you’re looking to pay something in the neighborhood of one dollar, the closest bet would be the $17 strike price, which closed on Friday at $1.15.

That means you could put down $115, plus commission, and you would get essentially all the profit from Silver moving above $17 an ounce between now and January. Of course, in exchange for that, your bet is worthless if silver remains under $17 for the next eight months (that is, if silver goes down, or goes up by less than 20% or so). Of course, you could trade in and out if silver fell or spiked over the remainder of this year, but for the purposes of a potential huge gain if silver climbs dramatically, we have to assume that you hold the options — so here are a couple scenarios that assume you buy this call option today:

1. Silver goes to $19 an ounce in January, about a 30% move from the current price. Since you have the right to buy shares of SLV at $17, we assume that SLV continues to track the physical silver price and those SLV shares are now also at $19. That means your option contract (on 100 shares, as is standard) is worth $200, so you get a nice gain of $85 (minus commissions) on a $115 investment, a gain of about 70%.
2. Silver stays pretty close to where its average price has been over the last three years, $12-14 or so. Your options expire worthless, and you’re out $115.
3. Silver goes to $28 an ounce by mid-January, doubling as the teaser implies is the “worst case” scenario — your $115 investment should now be worth about $1,100 (holding the option gives you the right to buy 100 shares at $17 and sell it at $28, for an $11 profit per share). That’s a gain of over 950% — not bad work for eight months, and the return from holding the actual SLV or physical silver would have been more like 100%.
4. Silver goes to $150 an ounce, which the ad argues is “likely” given the shortage and the rising investor demand. Then your $17 call option is worth $133, and you’ve still got a call on 100 shares, so that’s $13,300 from your initial $115 investment, for a return of … 11,000%? feel free to check my math on that one.

So that’s my best estimate as to what the “silver shots” are — partly because the numbers match up very nicely from the tease and the newsletter is options-focused, and partly because if you’re going to help retail investors get this kind of leverage it’s probably not going to be something more obscure like futures options — and, depending on the contract, some of the SLV options actually trade in decent volume, so a newsletter could get away with recommending them without wildly moving the price. And yes, options trading is regulated by the US government, just like stock trading, so that part of the tease can be justified.

And no, it’s definitely not some secret kind of actual silver metal that inconceivably trades at a huge discount and provides huge leverage — that doesn’t happen. (You can buy silver “shot” — little vials or bags of industrial silver pellets, they look just like little ball bearings, and every time I see it I picture myself loading it into shotgun shells to ward off the werewolf … but it’ll cost you at least the melt value of the silver these days).

Here’s the final summary of reasons for doing this, per the teaser:

“Fact #1: Vanishing supply: The global silver supply has practically vanished. In fact, 97.5% of all the silver ever mined has been consumed by industry. It is gone forever and irreplaceable at any price. The supply is so tight that the U.S. Mint had to halt production of American Eagle silver coins.

“Fact #2: Soaring Demand: The demand for silver is soaring. That’s because for many industrial uses, there is no substitute for silver. Silver is essential for electrical grids, hybrid cars, medical applications, photography and many more. We have to have it!

“Fact #3: The Price Is Right. Silver is near its historical low… around $14 per ounce. Its historical high is $1,400 per ounce. Even if supply/demand forces drive silver only a small fraction of the way back to its historical high, people holding “silver shots” will make a fortune.

“Fact #4: Unprecedented Upside Potential! “Silver shots” allow you to control a full ounce of silver for just $1. And while “silver shots” move in line with silver prices… they move exponentially higher. That means even a small move in silver prices will send silver soaring.

“Fact #5: Trigger Point Has Been Hit! Powerful economic, market and geopolitical forces have converged to create a “once-in-human-history opportunity.” People who buy “silver shots” today for $1… can realistically hope to sell them for $130 or more in December 2009. ”

I’m sure there are many folks here who know the silver market much better than I do, and I know many of you feel passionately about it, so I’ll let you argue about the supply-demand equilibrium that you expect for the rest of this year — let me just comment briefly on these things to provide a possible counterbalance to the argument …

#1 — supply of silver from mines might actually increase as base metal mining increases (silver is often a byproduct of other mines), and as some big silver-focused mines come on line in the near future — the spike in silver over the last few years made silver exploration viable on its own for some companies, so there are likely to be more silver mines in the years ahead.

#2 — silver demand from industry does seem to be increasing, but a lot of that industrial use depends on economic growth. Silverware demand is down and photography demand is way down, and both of those were major markets for silver ten years ago … the spike in demand over the last year or two is explained, by a lot of people, as largely investor demand, from the Silver ETF and coins … that kind of demand can be a lot more fickle than industrial demand, so gravity might come into play at some point.

#3 — I have no idea whether silver will return to its “historical high” of $1,400 in 2009 dollars, but do note that this high was in 1477, according to the chart in the teaser, before Columbus sailed to the new world (and before the conquistadors found all that new gold and silver). Silver has been on a steady trend down ever since, notwithstanding the one really dramatic historical spike in modern times, when the Hunt brothers tried to corner the market and temporarily got prices up to something like $50 an ounce in 1980 (probably near $100 an ounce in current dollars). And the price can go well below it’s recent average, too, it’s been down below $5 in recent memory. I’ll go out on a limb and say that if it does go to $1,400, it sure ain’t going to be in time for your options expiration in January.

#4 — that actually sounds just about right — you get nice big leverage from the options … he doesn’t remind you that the leverage comes at a price, that you have to be right about the timeframe and the price levels, and be willing to give up your entire investment if you’re wrong, but we all probably know that about options trading anyway.

#5 — that’s your call. If silver does go to $150 by January (or, God forbid, $1,400), then this certainly was a “once in a lifetime” opportunity to profit from that. But that’s a BIG if — according to the chart they use in the ad, silver has not been that high ($150) since the American Revolution. Certainly not impossible, but even though I own silver I don’t think it’s going anywhere near that high in the next couple years. A decade, maybe.

So … I personally own some silver, too, and I actually think it’s more physically attractive than gold (for whatever that’s worth), but the bulk of human history disagrees — gold is the one that has historically spent more time being considered “money,” so even though it has much less value in the real world than silver, it remains a fallback position when other mediums of exchange fall apart … thus, people in countries with unstable currencies buy gold jewelry for brides (India), and people who fear the demise of fiat currencies in general buy gold, and those who think inflation will be out of control thanks to the printing of new money, buy gold. In recent years, silver has come in as the poor man’s silver to cope with these same situations, but I’d be more confident in gold if things got really cataclysmic.

Like anything else, a precious metal is only worth what someone is willing to pay you for it, so there is always the fear that investor demand — which truly drives the price now, jewelry is taking a backseat during this latest gold rally, and industrial demand is probably suffering from the continuing death of traditional photography and the weak global economy — could dry up if cash is needed elsewhere, or if deflation really sets in. The brief fear of deflation recently gave the dollar its rally, and that seems to be over now, but I don’t know if it will come back.

Deflation is scarier than mild inflation, and perhaps even scarier than brief periods of severe inflation, but I’d personally have to agree that inflation worries me more as a saver right now — if only because I know the federal government is a lot more afraid of deflation and will print as much money as is needed to stave it off. Yes, I said “saver” — I think that’s a reasonable way to think of gold and silver bullion, as a way to preserve your savings … I perfer to think of “investments” as assets that can generate income and help you compound that income into long term growth, like stocks, or bonds, or land … or a gold or silver miner.

At some point, there will be so much money around that companies and people will have to start spending it, even if they’re still nervous about the future — it’s the American way. Will that drive hyperinflation in the very near term, and send asset prices shooting through the roof? That’s about the only scenario I can bring up that gets silver to $150 in eight months, and it’s certainly more feasible than it would have been a few years ago, but it still seems … well, I’ll be kind and say “a bit ambitious.”

So whaddya think? Any of you options traders have ideas for leveraging silver that are more exciting than my vanilla description? Preferred ways to play silver in the years ahead? Does silver shot really work on werewolves? Let us know.

And if you’ve ever subscribed to Death Cross Trader, click here to let us know what you thought — we’ve had two brief reviews submitted so far, with an overall assessment that I would classify as “tepid,” so we could use some more input. Thanks!