What’s the “$1 ‘Silver Shot’ Poised to Skyrocket 12,785%?”

By Travis Johnson, Stock Gumshoe, November 19, 2010

I originally wrote about “Silver Shots” as teased by Zachary Scheidt for his Velocity Trader about a year and a half ago, but much has changed over that time and an extremely similar ad is running right now, so I thought I should give it another look.

Here’s how the teaser sounds:

“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…”

Oh, wait — I mentioned that it was a year and a half ago that I wrote this one, and I just copied that over from the original article … it’s now that …

“… you must act by November 25, 2010, to ensure maximum gains.”

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 suspended production of 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” and not required by law. 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 the “uncirculated” fractional gold coins (1/2 ounce, 1/4 ounce, etc.) which haven’t been produced for a couple years. The Mint has recently announced, by the way, that they will be producing a limited number of proof American Eagle silver coins, and they do have proof gold Eagles available for sale now, so they are no longer completely at a halt — but they will not produce the less expensive “uncirculated” collector coins in either silver or gold in 2010, and won’t begin producing them again until they have access to enough gold and silver blanks to exceed the demand for bullion coins. The bullion coins aren’t sold directly by the mint, but they’re easy to buy through dealers or banks and readily available.

Since this (apparently successful) ad campaign started running, the name of the newsletter has changed — it used to be called Death Cross Trader and is now called Velocity Trader, still edited by Zachary Scheidt. He’d like you to subscribe to his newsletter for $495 (for two years, to be fair), 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.

And yes, though the

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 just a few months ago, 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. ”

That bit, by the way, is almost exactly the same as the first time the ad ran — though the copywriter had to update it slightly and revise that factoid from the Wall Street Journal to say “a few months ago” instead of naming the Month, since that story is getting close to two years old.

And the $31 price is still real and actually far more reasonable now than it was in the earlier silver mania of early 2008 — and the $1 face value of an American Eagle silver coin is still pretty much meaningless, they’re minted for investors and are not circulating currency. Premiums for silver coins, as a percentage, are usually huge compared to gold, so you’d probably actually pay close to that much for a decent American Eagle silver coin right now even from a reputable dealer, not just from ebay — and even a more generic one ounce silver round or bar would probably cost you about $1.50 per ounce over the spot price unless you buy in large volume (so, $28+ at the moment with silver in the mid $26’s). That’s a larger dollar premium than when this ad first ran, but a smaller percentage premium (silver was around $14-15 back then, in the Spring of 2009).

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.”

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So that’s not bad, right? This is clearly a heavily leveraged play on silver of some kind — after all, even buying silver at $26 and selling it at $150 would provide a huge return, but only something like $60,000 from a $10,000 investment, far less than $1.3 million. That extra 10X return (plus!) comes from the leverage of “silver shots.”

That “historical average,” by the way, apparently requires going back to the 1300s — they include a chart that you may have seen before, showing that historic silver price topping out at something like $1,400 per ounce in today’s dollars before the “new world” discoveries were made in the 1500s, and lingering around $150 for a couple centuries then falling fairly steadily until the Hunt brothers drove it to a nominal $50 or so when they tried to corner the market about 30 years ago, and then the recent recovery from about $5 20 or 25 years ago to the $15-25 range that the metal has traded in for a couple years now.

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 $34 per share [Gumshoe note: I think they meant to say “ounce” here, maybe giving something away with the “share” slip].

“In other words, it nearly 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 $34.

So what can that be?

Well, the ad has changed slightly over the years and been updated for new prices, but it sounds like he’s still teasing:

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, minus their expense ratio which works out to usually about a half a percent.

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 — and since SLV is up hugely just over the past few months, you could certainly have already made some dramatic returns if you were well placed with some call options going into September or October, though that also means that speculation in those options has heated up a bit and they seem to trade with a bit more of a premium these days.

Since the ad often teases a “by the end of Spring” timeframe, let’s look at the long-dated call options.

SLV has an option string available for April 2011, which fits reasonably well with the “end of Spring” timeframe (you can argue that’s “beginning of Spring,” but the next expiration after that isn’t until January 2012 right now). So if we look at that we can see that if you’re looking to pay something in the neighborhood of one dollar and making this a $1 “silver shot”, the closest bet would be the $32 or $33 strike price, which are trading a few cents on either side of a buck. But those are relatively low-volume contracts, most of the volume and open interest in SLV options is in the $5 denominations — so if that’s of interest to you (and if you want to mimic Scheidt’s ideas it should be of interest, since any option contract with a newsletter recommendation should, unless the letter is tiny, show a pretty large open interest — that means there are more of these contracts in existence than there are for the others). That would skew your price away from $1 — the $30 strike is about $1.55, and the $35 strike is somewhere around 70 cents.

The $30 strike price has open interest of around 35,000 contracts according to Yahoo Finance, which makes it the most popular price for April expiration, so we’ll assume that’s the most likely and I can give you an example of how it might work:

That option contract would mean you put down $155, plus commission (that’s $1.55 per share, but options contracts are almost always for 100 shares so one contract is $155), and you would get essentially all the profit from SLV moving above $31.55 between now and April (if past practice holds, that would probably mean the spot price goes a bit above that, maybe to $32 or a bit more). That $155 gets you this exposure for 100 shares of SLV, so if SLV goes to $40 by mid-April, that $155 should go up to about $1,000 (your option gives you the right to buy the ETF at $30, and since the ETF is at $40 that right is worth about $10 per share, and each options contract is for 100 shares so that makes $1,000).

Of course, in exchange for that leverage and a relatively small cash investment, your bet is worthless if silver remains under $30 for the next six 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 that time, but for the purposes of a potential huge gain if silver climbs dramatically, we have to assume that you hold the options.

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… in the $20 per ounce range. 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 the coming months. ”

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 April.

#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 April (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 seems to have historically spent more time being considered “money” (you can feel free to disagree about that if you want, I’m not an expert on money history), 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 gold to cope with these same situations, but I’d probably 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 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 as inflation fears are hitting again, 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 prefer 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 some 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 six 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.”

Still, I must give our intrepid Velocity Trader some credit (or Death Cross trader, at least), if they really put this recommendation on when Silver was several dollars lower (around $20) a few weeks ago, as is implied by some of the teaser copy, then those call options have already gone up — if they used the one I supplied as an example, they’re up by 50% and would have been up higher recently when silver got up to about $28 briefly after the latest Federal Reserve easing announcement. And though I don’t know how the “silver shots” would specifically have worked as an investment when they were teased in the spring of 2009, silver in general has been a spectacular speculation over the last couple of years if you came even close to getting the timing right. Dunno if that means silver is meaningfully over $30 in April or not, it has certainly had a history of coming back down hard after sharp rises … but that’s history, which, given the big swings in the silver chart and the combination of monetary policy and industrial demand drivers, might not give much predictive power.

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.