Silver on Spec

[IdahoCopper]

Let's discuss this hypothetical scenario:

A person has $100,000 available credit on credit cards, the minimum payment is 1% of the balance per month.

He borrows $100,000 on the cards and buys .999 Ag, paying $30 per oz for 3,333 oz.

Each month, if the price he could sell at was always steady $30/oz, he would need to sell 34 oz each month to pay the minimum due on the cards. At that steady rate, it would take just over 8 years to deplete the Ag by paying the minimum due on the cards. At the end of 8 years, he would have no Ag and have about $90,000 in debt.

Assuming Ag will increase in value in the next 4 years, perhaps to $95.50 per oz, he could realize quite a gain. As the price increases, the amount of Ag needed to sell to make the monthly payments would decrease. If it was completely linear, this is what is possible:

4 years
Quarterly … Ag Hoard …..3x mo. oz …$/oz ….. Increase ….. Tot. Value ….. Debt
1 ….. ….. 3,333.0 ….. ….. 102.0 ….. $30.00 ….. $0.00 ….. $99,990 ….. $100,000
2 ….. ….. 3,231.0 ….. ….. 96.8 ….. $31.00 ….. $1.00 ….. $100,161
3 ….. ….. 3,134.2 ….. ….. 92.3 ….. $32.50 ….. $1.50 ….. $101,862
4 ….. ….. 3,041.9 ….. ….. 87.0 ….. $34.50 ….. $2.00 ….. $104,946
5 ….. ….. 2,955.0 ….. ….. 81.1 ….. $37.00 ….. $2.50 ….. $109,334
6 ….. ….. 2,873.9 ….. ….. 75.0 ….. $40.00 ….. $3.00 ….. $114,955
7 ….. ….. 2,798.9 ….. ….. 69.0 ….. $43.50 ….. $3.50 ….. $121,751
8 ….. ….. 2,729.9 ….. ….. 63.2 ….. $47.50 ….. $4.00 ….. $129,671
9 ….. ….. 2,666.8 ….. ….. 57.7 ….. $52.00 ….. $4.50 ….. $138,671
10 ….. ….. 2,609.1 ….. ….. 51.7 ….. $58.00 ….. $6.00 ….. $151,326
11 ….. ….. 2,557.3 ….. ….. 46.5 ….. $64.50 ….. $6.50 ….. $164,948
12 ….. ….. 2,510.8 ….. ….. 42.0 ….. $71.50 ….. $7.00 ….. $179,524
13 ….. ….. 2,468.9 ….. ….. 38.0 ….. $79.00 ….. $7.50 ….. $195,041
14 ….. ….. 2,430.9 ….. ….. 34.5 ….. $87.00 ….. $8.00 ….. $211,488
16 ….. ….. 2,396.4 ….. ….. 31.4 ….. $95.50 ….. $8.50 ….. $228,857 ….. $95,000


Finish = 1,401.6 oz;
Value = $133,857;
Debt = $0

Yes, its not a perfect world, and like any investment/gamble there are risks. But with the near-certain increase in the price of Ag, this looks like a pretty good bet. Additionally, if the price increases a lot early-on, the gain and the remaining Ag would be a lot more.

Comments?

[Nickelmeister]

If you were going to do this, it would be better to take a line of credit against your home (if available) and get a much better rate than 1%/month.
But in your hypothetical scenario the worst that could happen is a default of your credit card(s), instead of ending up homeless.

***However, I do not recommended using any type of leverage to puchase PMs***

[IdahoCopper]

Of course it is possible to bail out at any time the price of Ag is above $30 and retire the debt. He may even have some Ag remaining after cashing out to pay the debt.

[frugalcanuck]

the math makes sense but it is risky. considering how well the price of silver is suppressed any leveraging for silver is risky. but risky could be profitable.

[beauanderos]

I did exactly this in March 2003. I call this the plastic carry trade. I didn't have any cash, but put $161,000 on credit cards and bought silver and gold ($4.50 an ounce, $322 an ounce). Stopped contributing to my deferred comp and mutual funds and used that money to make the payments. I've knocked about $50,000 off the debt load, and still have the entire amount of original purchase. Since then, silver is up about 31% a year vs credit card interest of 2.9 - 8.9% annually. Would I recommend anyone else doing this? Not necessarily... but if you can borrow against a 401k and pay yourself back the interest... then you've just created your own precious metals alternative within your retirement and hold something tangible rather than worthless depreciating paper numbers. I am intentionally keeping the debt right now, and continuing to pay it off monthly with ongoing fiat salary, rather than liquidating a sufficient amount of PM's to sell and be debt free... because I continue to believe that the annual increases in value in PM's will far outpace the paltry interest rates I'm paying now (2.9 - 4.9%) Your own results may vary.

[Rodebaugh]

If you were going to do this, it would be better to take a line of credit against your home (if available) and get a much better rate than 1%/month.
But in your hypothetical scenario the worst that could happen is a default of your credit card(s), instead of ending up homeless.

***However, I do not recommended using any type of leverage to puchase PMs***

yeah and in the US the interest is tax deductable for home loans

[IdahoCopper]

A point to keep in mind is he is converting FIAT DEBT into lots of PMs, with no cash savings out of pocket. As inflation increases, it is less costly to make the debt service payments by selling the Ag.

Ultimately the only thing that prevents credit card default for anyone is the value placed on the credit scores.

If he decides those numbers are meaningless in the grand scheme, (SHTF, EOTWAWKI, etc.) then who suffers from any default? The Big Banks and the Banksters? Think about it.

[Copper Member]

I would DEFINATLEY not borrow agaist secured debt to do this if you cannot make the montly payment without selling the metal. Well unless you wanna be homeless.

[beauanderos]

I would DEFINATLEY not borrow agaist secured debt to do this if you cannot make the montly payment without selling the metal. Well unless you wanna be homeless.

I think this is just plain common sense, yet shows wisdom as well. Don't spec with money you can't afford to lose. If you have to liquidate your silver as you go, it raises too many problems. If you can afford to service the monthly debt, then CC's are just one means of securing a loan to use for your own purposes. But never exceed your capacity to pay (this also means having sufficient savings to weather a job loss, and knowing that your own job is secure).

[IdahoCopper]

I disagree..... it does not raise too many problems to sell the Ag to make the debt service payments. Craigslist and Realcent are both good ways to convert Ag into fiat to pay the monthlys. It is just not that big a deal to sell small quantities in the physical Ag market.

And its not "money you can't afford to loose" Its fresh fiat credit/debt that the only hold over him is his "credit score", encouraging him to not default.....that's it. Period.

Also, the new debt is backed by the PMs purchased if he chooses to not default. At anytime he can choose to sell as much of the PMs needed to retire the debt, so long as the price is not crashed below the purchase cost by the manipulators.

And finally, if the price is crashed too low, then why sell off the PMs to avoid default? Keep the PMs, accept the 350 or less credit score, and carry on until the defaulted cards expire off the credit reports.

These are the true differences between fiat/debt/credit and the real and tangible value of PMs. When the economy is on its last swirl before being permanently flushed down the tubes; you will remember this thread and wish you had converted ALL your available fiat dollar credit into PMs.

[Copper Member]

I'm not talking about borrowing on credit cards. I'm talking about secured debt.

[IdahoCopper]

CM - Yes, I agree. It is not a good idea to use secured debt for this.

[Tourney64]

Remember if you were to buy $100,000 worth of silver eagles and then immediately turn around and sell them you would not recover the $100,000 due to fees and taxes. Turn in your fiat paper into hard assets that will help when EOTWAWKI.

[IdahoCopper]

Tourney - You are right about ASEs, the premium is too high. But for example, Tulving.com is selling Amark 1oz rounds for $0.89 over spot.

I think those folks with a solid "hoard and hold" mindset would have the most difficulty with the scenario. It would be too disappointing to sell some of the hoard each month to make the debt service payments.

Of course, a person with some savings funds coming in every month, could offset and prevent a part of the budgeted Ag sales each month. If the debt service is $1,000 each month, and he has $500 cash each month for this program, he could make the debt service by selling only half of the budgeted Ag, each month.

In the end, it is about a 4-year program, with significant risk, but not an unconscionable risk. To each their own.

[argent_pur]

I don't have a huge appetite for risk, but, on the subject, I just bought a 1 oz. gold maple on my CC that will take 6-8 mos. to pay off. I thought at first "what if I buy only 1/4 ozs. with CC which take 2 mos to pay off, and costing me 2 bucks in interest for the trouble. I do that 4 times and I pay 8 bucks in interest for a complete oz. Whereas, if I buy a full oz. in 8 mos. I will have paid somewhere around 70 bucks in interest." Sounded like a no-brainer at first, until I remembered that, the spread difference between (4) 1/4 oz. maples and (1) 1 oz. maple is around $70-$80. So, the difference between the two approaches is miniscule. I don't have an issue using credit to buy PM's (in small doses), but I do value my credit score.

Besides all that, I have a wife and three kids, and I'm not willing to risk damage to my credit that could hurt our family down the road. "I'm a parent, I haven't got the luxury of principles."

BTW, even using the CC, I still got the Maple for 5.5% over spot, which I think is pretty cheap for a CC purchase

[highroller4321]

I am suprised there isnt more discussion on this.

[Silver Addict]

I think it is crazy to buy something as volatile as silver near it's 30 year high using debt. Especially a CC charging 12% interest. Only option I might consider is borrowing against a 401k to diversify. Lower interest rate, and payments automatically taken from your paycheck.

[IdahoCopper]

I think there are two very wise opinions in this thread.

FrugalCanuck said:
"considering how well the price of silver is suppressed any leveraging for silver is risky"

and Silver Addict said:
"I think it is crazy to buy something as volatile as silver near it's 30 year high using debt."


Perhaps doing this "silver on spec" idea would be more prudent on a major pull-back of the price.

[Lemon Thrower]

using leverage is tempting but risky. you don't want to lose your position.

that said, it does make a lot of sense to stop contributing to deferred comp plans (401k), paying down your mortgage, etc. a loan from a 401k can also make a lot of sense.

[beauanderos]

Idaho Copper... the table you conclude would portray the advance of silver to higher levels is MUCH too conservative. It will advance much more quickly than that (or conversely, the dollar will depreciate much faster). I am absolutely convicted this will occur, there is no other possible outcome. In a highly inflationary environment conservative savers are punished, and risk-taking debtors (who bought precious metals) will be rewarded. The danger in using credit cards to secure your capital for buying the PM's is that even with low fixed rates now... at any time the banks can change the rules and jack up rates to a point where this scenario would no longer be potentially profitable. As far as suppression goes... I've changed my mind on that, and am willing to patiently await the end of price-suppression schemes when physical scarcity of silver prevents further manipulation. We are rapidly approaching that point (witness increasing reports) and the longer the price remains low the more rapidly the remaining stocks will be snapped up. The thirty year high of silver has little to do with it's value as a commodity, it says more about the weakness of the dollar... and if you think the dollar will strengthen, then go ahead... take comfort in keeping a walletfull of worthless fiat instead of dollar cost averaging each month into an amount of silver or gold that is affordable. I want as little fiat as is necessary, just enough to pay bills... the rest is converted immediately to real money.

[camtender]

One thing to consider, if you default on your credit card (or any recourse debt for that matter) you will most likely be filed against by the creditor and taken to court. Once they obtain a deficiency judgment against you, they have the right to garnish any wages they can attach to.

Also, if you file for bankruptcy, you will have to swear on oath that you have listed all your assets. I can promise you that you do not want to start lying in a Federal Bankruptcy court and get caught, you will most likely serve time if they can prove that you materially understated your assets with the intent to deceive the court.

Here is an example of what happens when you try and hide silver eagles from the court (please notice the picture)

http://stevesathersbankruptcynews.blogs ... e-you.html

Having said that, the issue being discussed here is called leverage, specifically, leverage on physical PM.s. Each person is unique in their financial situation, we all have different levels of employment security (if we are employed at all right now), different appetite for risk and levels of reserves to ensure we don't get cash strapped. The forced liquidation in the fall of 2008 when all the margin calls came should be a reminder in the back of all of our minds.

Nobody can tell you what the right investment methodologies is, there are several examples here to consider, but that is just what they are, examples and noway a template for all of us to invest.

I suspect the most important consideration would be your risk tolerance, as many people get shaken out of their positions during sharp sell offs and their investment convictions are lost.

For the risk adverse, sorting the copper pennies is a way to obtain an important base metal at a 66% discount with no investment or liquidity downside because of the face value factor. I know of no other metal I can get for this level of discount (save the rare silver/gold buying opportunities).

But then again, 95% of all wealthy people became wealthy using leverage.