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SOVEREIGN MAN

Four silver investments to avoid

April 11, 2011
Manila, Philippines

Tim Staermose here, Simon’s tied up today looking for property on the Chilean countryside.

Nine years ago I gave up my six-figure salary, bonuses and perks, and resigned from my job at Lehman Brothers in Hong Kong. I could see we were on the cusp of a massive bull market in gold and precious metals, and I’d received an offer from a former employer to begin writing an investment newsletter covering gold.

I figured it was a no-brainer. Gold was below $300 an ounce and nobody wanted it. The price wasn’t even quoted on the financial news any more, and people laughed at me when I said I was buying gold.

In 2003, when I first wrote “The Case for $1,000 Gold”, people again poured scorn on my predictions. But, I had the last laugh. Gold has since climbed more than 4 1/2 fold, to be trading comfortably above $1,400 an ounce.

Today, the bull market is long-in-the tooth. And honestly, I’m not that interested in gold any more. I’m looking for the “next big thing”… something people will laugh at me for buying today.

I’ve not yet found it. But, I’ll keep looking until I do. (Incidentally, if you know of a cheap and hated asset, other than US housing, we at Sovereign Man would love to hear about it.)

Don’t get me wrong; I’m not suggesting you sell all your gold today. My own version of Pareto’s 80/20 rule, applied to the financial markets, is that 80% of the profits often come in the last 20% of the move’s duration.

When the mania stage hits (and I know many smart people who argue we’re not there yet) it’s not inconceivable to me that gold could triple again in fairly short order.

The move in silver, meanwhile, has been even bigger than the move in gold. Since 2002, silver has risen more than 8 fold.

If the gold bull market is long-in-the-tooth, the silver bull market is positively doddering and entering dementia.

And, as with all great bull markets, a plethora of new ways to invest in silver, along with a whole new crop of providers to purchase them from, has sprung up left, right, and center.

Again, don’t get me wrong. I’m not suggesting you rush out and dump all your silver. I’m simply advising you keep a cool head and stay rational in your appraisal of the likely future gains.

I’m also suggesting you don’t go ANYWHERE NEAR the following 4 silver investments.

1. The iShares Silver Trust ETF (SLV). Paper is NO SUBSTITUTE for the real thing.

I know that, according to the prospectus, “Authorized Participants” can ostensibly demand to take delivery of silver from the SLV trust in baskets of 50,000 shares (500,000 ounces of silver at a time).

But, there are all sorts of weasel-out clauses that mean, in practice, if there were ever a true “SHTF” scenario, the mechanism could be suspended. And, as a small fish with less than 50,000 shares, you have no leg to stand on. SLV is a paper security, just like any other listed on the stock market.

It may offer a “claim” on silver. But, it’s not the same thing as silver. Buy it, and you are subscribing to the “Greater Fool Theory” — namely that you can unload your paper at an even higher price to someone who is late to the party.

2. 100-ounce (or larger) silver bars. The higher the price of silver, the greater incentive for fraudsters to make fake bars with lead (or whatever) in the middle.

Believe me, I’ve seen it with my own eyes. My friend Dan Rosenthal, former Editor of the Silver & Gold Report, once showed me a fake silver bar from the last big bull market in the late 1970s, sawn in half, which occupied pride of place in his office. In the middle were three lead tubes!

The higher silver goes, the more this sort of thing will be going on again. Caveat emptor.

3. Couer d’Alene (CDE on the New York Stock Exchange).

Since 2006 — during the second-biggest bull market for silver in history — this company’s stock has tanked 42%.

In the same time frame silver bullion is up more than 165%. Evidently, no matter how well silver does, this company struggles to make money. AVOID.

4. Silvercorp Metals (SVM on the New York Stock Exchange).

This company operates an excellent high-grade silver, lead and zinc mine in China, sporting an operating profit margin of a hefty 67%.

So good is it, and so richly valued is it, that the stock has little further upside in my view. It’s already sporting a multiple of 30 times cash flow, and 35 times earnings. AVOID.

About the author: Born to a Danish father and British mother, in Dar Es Salaam, Tanzania, Tim Staermose has led an international life since the day he was born. Growing up, he also lived in Egypt, Denmark, and Singapore, before eventually settling in Australia, where he completed his education and took out citizenship. Since then he has also lived and worked in Hong Kong, and Manila, Philippines, in the field of equity research — both for a bulge-bracket Wall Street investment bank, and for an independent investment research firm. Today, when not traveling the globe looking for investment and business opportunities for the Sovereign Man community and catching up with his diverse, multinational group of friends, he divides his time between Hong Kong, and the Philippines.

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Comments on this entry are closed.

  • gringoargentino

    Dear Tim,
    I think cash fits your requisite of “a cheap and hated asset”. What do you think?

    • Staermo

      The problem with cash — though I agree it is not popular to hold right now — is it is constantly losing its purchasing power vs. almost everything…
      That said, cash has a certain “option” value to it…in that it can be used to scoop up things of value very quickly, should the SHTF, and many things tank…

      • gringoargentino

        Tim,

        Thank you for the reply! I am 26 and just recently started studying markets. My argument for cash is as you say in the latter part of your response, that it could be used to scoop up other things when/if we have have a major crash soon. Anyhow this is all very interesting to me and I was just curious if you could recommend any good reading that may have helped you along the endless journey of market competence? Once again, thank you very much for your insight.

      • Staermo

        I helped my friend write this book: The Winning Investment Habits of Warren Buffett & George Soros: Harness the investment genius of the world’s richest investors

        Start with that, and then go to some of the books referenced in there as sources. It should clarify your thinking, and give you a framework. Best of luck!

      • gringoargentino

        Thank you Tim! I will be adding that title to my reading list.

      • Almag

        Dear Gringo:
        read this:
        I am 74 and retired in 1975 with enough money for me.
        In the early ’80s inflation took the buying power of 75% of my money. Since then it has taken much more.
        I have made investments and am still comfortable but no longer wealthy.
        Use cash for short term only… but beware.

    • http://pulse.yahoo.com/_KIRZSBSOQWEIGNURVTKR37LIGQ GMiller

      QE, hyperinflation, losing reserve currency status. It’s not hated yet, but will be.

    • Gene

       gold = a store of wealth
       cash = a medium of exchange/a proxy of wealth/NOT AN ASSET

       not the same thing

  • Stevekusaba

    A very timely article. One of the problems of comparing value in pricing is that when you do so in things priced in dollars you are in quicksand in terms of understanding where you are. If you compare copper to iron, or rice to corn there are ways in which you can get footing easily. But dollars are an abstraction that is enforced by police and courts while being worth nothing beyond that intrinsically. Thus it is easy to be tricked there. Marc Faber claims that gold is actually cheaper now than when it was under 300 dollars an ounce and I can see his point. How much currency has been printed since 2000? If you merely calculate the volume of currency versus existing gold in fact Marc is correct, that it is cheaper in that sense. Also we have to assume that dollars in 2000 were worth what they were in anything. Thus crazy parabolic price moves up and down in everything are in the cards in the future as it is the aggregate of all peoples perception of what value is and this will not lead to logical assessments or calm ones. I think the most intelligent people that were early gold bulls will make serious errors in assuming that “gold is overvalued because it reached a certain nominal value in dollars”. But it could go almost anywhere in a hyper inflation, when they keep adding zeros to things. So more accurate is what are other “things” priced in comparison to gold. Which will be equally complicated because many people will be devastated by a ravaged world economy and thus may not have the ability to purchase collectibles and such, or they might do so under duress.

    Philatelic assets are just such a problem, they are staggeringly undervalued by historical standards, the prices of most rare stamps are at or below their 1980s values and you can pick up extremely scarce things for tiny cost. Further problems with this? The base of stamp collectors is shrinking since most of them are very old and younger people are not moving into the space at the percentage they used to in the 50s and 60s. Also there is no intrinsic underlying value, it is all just demand. In a depression it would seem stamps would do badly. None the less I am putting a tiny amount into the space. Historically stamps from Japan, China, Switzerland, Germany, Saudi Arabia etc. have done well. Places where you expect the economies to work better than other parts of the world are where you might be interested. Other areas have big scarcity issues like Lebanon (civil war destroyed much of the stock), Cambodia, ethiopia, dead countries like Nyassa and Obock; Castellorizo; Cyrenaica, etc etc. Sticking to pre 1950 stamps is also a good idea. It is a treacherous space that stamp collecting occupies because of counterfeiting and grading issues so learning is essential.

    But none the less I would never fully leave the metals irregardless of crazy valuation until there is a money situation that is stable.

    Great topic!

  • http://www.capitalistexploits.com/ Chris

    Undervalued….Mongolia

  • theprimalprepper

    Good post. I hadn’t known that about CDE.

  • Mping

    Silversaver.com

  • JT

    If you’re looking for a cheap asset that’s hated, try Natural Gas! Plus, it’s just a matter of time before a massive switch over by utility companies to NG. And if the Govt truly had the people’s welfare at heart, they would stop giving handouts to foreign countries and use the funds to build out infastructure for Natural Gas fueling and vehicle conversion. Natural Gas is cheap, cleaner burning and we are the Saudi Arabia of NG with the largest reserves in the world. Plus we should be building LNG export terminals and start selling all this excess capacity world wide. With the right moves, we could be energy independent! And don’t tell me it can’t be done. Brazil switched over their whole country to sugar based fuel and are no longer dependent on foreign countries…

    Now, the question is how to play NG. ??? You get killed on rollover (and volatility) in Futures. UNG is a nightmare because of this rollover issue…

    I’m in Anderson Energy (AXL.TSE currently $1.10) and Galleon Energy (GO.TSE currently $3.78) and have also heard good things about GMXR and AAV. Suggested that you do your own due diligence…

  • Striptees

    What about PSLV? Similar to SLV but allegedly not paper.

  • http://pulse.yahoo.com/_R4YEEESLZY3RSORNGJEJN6OE4E John R

    What he does NOT say is that 90% coin silver from Monex in sealed $1,000 face value bags are still obtainable and costing in the $30,000 range (haven’t checked lately). Only dime bags were available last time I bought but quarters USED to be there, too, maybe again. Although many dimes are worn thin, there are nuministic values there to make up for it somewhat. Never the less, when we are evolved to a barter economy, silver coins will have an exchange value.

  • http://profiles.google.com/gaijin42 Jason Coyne

    I invest in physical silver (mostly junk silver) with spare money. But what is the best way to protect money in my IRA/401k?

    I currently have quite a bit of money in PM, split between SLV, SIVR, PSLV, SGOL, and GLD

    PSLV may be the closest to “physical”, but has a pretty big premium. I suppose the premium wont matter if hyperinflation kicks in, and if I sell it to someone else with the premium attached im out even. But is it actually any safer than SLV?

    • Seamoosey

      PSLV has taken a bigger pounding in the last two days than SLV. I own PSLV. I am just shaking my head cause it doesn’t make sense.

      The mining shares have been crushed while silver barely moved and still closed over $40. What is up with that?

    • Fkloster

      I am sitting on SLV and GLD myself. It’s in an IRA so any thoughts on what is the safer alternative would be greatly appreciated.

      • http://pulse.yahoo.com/_KIRZSBSOQWEIGNURVTKR37LIGQ GMiller

        CEF, GTU. Outside te IRA: goldmoney.com and coins.

      • Jerry

        Buy a trailing stop loss at 20 % and stop stressing.
        Jerry

      • Billp4

        Silver Bullion Trust

      • http://www.facebook.com/people/Christine-Kroeker/1239032574 Christine Kroeker

        If your money is in an IRA, it doesn’t matter what you invest in. The government knows about it and can take it. If your employer matches, it is probably worth investing only amounts that are matched. SLV and GLD are as good as anything else. The physical holders of silver & gold have high storeage fees and your bullion could still be grabbed by the government or the company could go bankrupt and the bullion “majically” disappear. If your employer doesn’t match, I’d forget about the IRA/401k and only invest in physical gold and silver that you keep in your possession. I’d also put a some money in food because you can’t eat gold. Because of the high penalties, it probably isn’t worth taking money out of your IRA right now. At some point, it could be worth taking the cash (even with the penalties) and buying physical assets fast. I think that the dollar being dropped as the world reserve currency might be the thing that triggers hyper inflation and is what I’m watching for before getting 100% out of dollars and IRA/401K.

    • http://pulse.yahoo.com/_KIRZSBSOQWEIGNURVTKR37LIGQ GMiller

      Transfer money from IRA/401K to a Roth or PM. Taxes may be higher latera nd all appreciation is tax free.

    • Rob

      You might want to look into a Precious Metals IRA in which you can own physical assets such as bullion.

  • Ddarnell

    I would agree with your comments on svm if production & earnings were maxed out and there were no new mines comming on line and silver prices had reached an expected 1 year top , but i dont think thats the case and while consolidation is possible , i see this stock at 50.00 by the end of 2012

  • Knight

    Uranium- does not get much cheaper or more hated then what we have today. Supply/Deman fundementals are beautiful moving forward.

    • SM

      Agreed. Nuclear is hated by media, but it isn’t going anywhere and the fundamentals are sound. The price has over-corrected in a major way and many top companies like Paladin, Uranium One, Uranez, Ur-Energy, etc… are on sale. We’ll always need energy, and while I am a fan of Natural Gas, Wind, Solar for low carbon options, Uranium and Nuclear are still a valuable part of the mix.

    • ScottW@lker

      Uranium-take delivery!

  • Keith Ohlson

    The next big trend (which is currently a hated asset) is natural gas…check it out!

    • http://pulse.yahoo.com/_KIRZSBSOQWEIGNURVTKR37LIGQ GMiller

      NatGas is in big excess supply due to technology improvements, overdevelopment and migration of large gas-consuming industries from the USA. World demand, migrtation away from coal and adoption of more NatGas vehicles may change the supply/demand equation in favor of the industry later.

  • Stereojsq

    Oh Great! I just took delivery of 100 ounce engelhard ingot earlier in the week.

    • Jarymclean

      saw it in half to see how much lead you bought!!!

      • me3tv

        or put it in water and measure the displaced volume at room temperature. then calculate the correct weight for AG at that volume. If it is off by more than a tiny fraction you got taken.

  • http://pulse.yahoo.com/_HS3XWB53QLERJDYYRHUV3AT4KU Jim
  • Tom

    Tim, your analysis of Coeur D Alene mines is complete rubbish. It boils down to: avoid this stock because it’s been a dog in the past! You’ve completed overlooked the fact the company has just built 3 large new mines, which have just come into full production. Silver has exploded in price, capex is about to fall and cash flows for Coeur are about to boom (something which hasn’t occurred at all in the 10 year silver bull market). So, right on the cusp of exploding free cash flows for Coeur d Alene, you’re saying to avoid this stock! Seriously, have you even looked at the company lately. It’s trading at somewhere around 5-7 times operating cash flow. I’m really interested to know if you’re holding some analysis back other than – this has been a poor performer in the past.

    • Peter

      Tom, the analysis that was held back was that the CEO of 25 years from the bottom of the market has destroyed the value of the company from 35 ounce of silver per share to less than one ounce today. That’s mindblowing. But not a big surprise. He’s a lawyer. So is his #2. And is #3. Heck, if it were a law firm it would have potential. But as a mining company? Not a chance.

  • SM

    Uranium is a hated asset class by the media and people that don’t understand energy market dynamics. While the Japanese tragedy is just that, Uranium is far greener than coal or oil, and is a crucial part of the immediate and future mix of global energy along with Natural Gas, Solar, Wind, Geothermal. However, it’s stocks have overcorrected due to media bombardment and many solid companies like Paladin, Uranium One, Ur-Energy, Uranium Resources, Dennison Mines are all on sale and will rebound in less than 1 year.

  • The small boob girl

    Several of my friends and I just invested some money into a midsize farm (which my whole family think I am stupid), I think the food price will go up.

    • JOHNNY

      GOOD MOVE. I HOPE TO START GROWING SOME FOODS SOON.
      I THINK WE COULD SEE SOME FOOD SHORTAGES IN THE NOT TO DISTANT FUTURE. HOPE NOT, BUT BE PREPARED.

    • http://pulse.yahoo.com/_KIRZSBSOQWEIGNURVTKR37LIGQ GMiller

      Thatis smart, If nothing else, you can live and survivce there.

    • Cuda Boy

      cuda boy well lucky lady im a farmer and i think you made a good choice.But rember the average yearly return is 5%.Its the long term appreciation in value where you make the real $.As for food price the farmer only receives 2-3% of that.The rest goes for transportation-fuel handling-groccer etc.

  • http://twitter.com/MichaelPorfirio Michael Mason

    I accumulated Couer d’Alene (CDE) last year any time it dipped under $15.

    I sold this year around 31-32.

    Not bad for 8 months work.

    Noticed it tanked today by almost 8%.

    - MPM

  • http://pulse.yahoo.com/_KIRZSBSOQWEIGNURVTKR37LIGQ GMiller

    Good advice. You obviuosly know what you are talking about. How about CEF?

  • Tomgra23

    On Silvercorp, this analyst is not credible. They have 2 mines in China, not one, the CEO is a VERY well connected genius at working the Chinese bureaucracy and, it has a wonderful property in mining friendly British Colombia. + it is listed on Toronto and, therefore, must use Cdn. accounting rules.

  • Jmcshane96

    What’s you opinion of AG,EXK or FASV?

    • Julie

      What about SLW and Hecla?

      Julie
      Isagenix

    • Law

      I bought SVM about 6 months ago…up about 70% as of last Friday. You seem to know more than me on SVM and until I saw your comment, was looking to sell and invest in silver somewhere else….any suggestions? I think silver is for the long haul, but maybe I should diversify

  • Excalinbh

    How can one verifty that the gold or silver bullion purchased is actually that and not a fake. I have been buying gold from a reputable dealer and want to get into silver.

  • DRS

    I don’t understand why you would recommend anyone not buy SLV. Most of us don’t care about owning physical silver because we are not planning for the end of the world.

  • AuElse

    Have you ever considered a subscription to Le Metropole Cafe?

  • Steen Qvist

    What is up and down in this discussion ,
    what is the facts about  silver Ishares SLV ?
    And Silver corps metals inc..

  • http://www.silver-price-today.net/ silver price today

    Hi,

    Thanks guys for giving information about Four silver investments to avoid.

  • Mattharris20

    I gotta say good job on the SVM call. You basically nailed the top at $16 bucks and here it sits at 6. I should have sold!

  • Gene

    SLW (Silver Wheaton) has taken a real pounding lately. Am not suggesting anyone buy it, but I have traded it quite a bit. Also consider physical platinum. My thinking there is that the apes at the TSA airport rape scanning stations are probably too stupid to know what platinum is. they may ask you if you are carrying gold; doubtful they would ask about platinum.

  • Gene

    “(Incidentally, if you know of a cheap and hated asset, other than US housing, we at Sovereign Man would love to hear about it.)”

    Coal stocks (BTU,ANR,WLT). Hated, beaten, left for dead!

  • Joe

    “people laughed at me when I said I was buying gold.” 

    Yeah, that would include me, right now and 9 years ago.  Gold is a stupid “investment”, that only enriches the gold exchange. You can’t buy anything with gold (such as things you actually NEED).  I’ve never understood the so-called “demand” for gold (or silver) except as marketing hype for the gullible.  Both must be exchanged for something worthwhile (otherwise you have a pile of useless metal on your hands). Which means you find a coin / gold dealer somewhere, accept the going “rate”, turn it into fiat dollars which are more worthless then ever, then go buy what you need at the current inflated price.

    The entire process bleeds you dry.  Why not just buy what you need RIGHT NOW?  “Investing” in something that forces you to convert to cash is STUPID.  Food, land, water, tool, equipment, materials — all these items go up, up, up in cost. They’ll last decades (or even indefinitely) if you buy right. And you will ALWAYS need these things.

    I listened to the stupid advice, bought hundreds of ounces of silver and held it. Still got the useless shit.  I’d rather have a several years supply of food.  Or a tractor. Or something I need.

    Talked to several “dealers”. They want their pound of flesh to convert to “cash”, which would actually be a “check in the mail”. Which means it’s not easily or quickly converted.  During a crash, they’ll stop buying the stuff too, which means you’ll have to find some sucker who wants it.

    In collapse, gold and silver “trade” at junk prices (truly), the same as junk jewelry. Many people will refuse to accept your gold or silver, as things like food and ammo or medical supplies are far more valuable (and needed).

    Anybody that buys gold or silver is a nutcase, seeking to leverage their position against the dollar — but few seem to realize that it’s a worthless investment that must be converted (time and expense), and then once that’s done, you’re paying the higher price (inflation) of what you needed all along.  Better to buy what you need now, bypass the gold / silver scam altogether.

    • Buddy

       Joe, I’ll try to answer some of your concerns. You are only considering the value of precious metals in relation to a fiat currency at this moment. It’s only a matter of time until the mathematically inevitable collapse of the dollar which will bring down every other fiat currencies. Buying gold and silver is never intended to make money in the short term. The point is to preserve your wealth when the fiat scheme goes belly up, and it certainly will. If you’ve bought so much that you regret not buying food or other necessities, well I agree with you, you should have bought those first. When you have wealth left over after preparing for a financial collapse with food and other supplies, then you put that wealth into precious metals.

      If you think buying precious metals “bleeds you dry” try buying them after a financial collapse. No one will sell it to you for any price, but I guarantee you that there will be buyers willing to give you worthless paper for them.

      Gold and silver especially are very, very undervalued in relation to the inflated currency prices attributed to them. It’s a matter of perspective really, and it’s a matter of time before your perspective will be changed completely.

      I’m not sure where you’ve heard that no one will buy precious metals during a collapse, but that is not what history has taught us. Name any example in the last 2000 years.

      If doing your own research doesn’t convince you and what I have written doesn’t convince you, please please sell your silver this instant.

    • http://www.facebook.com/sixmidgets Shaun Johnson

      So the dozens and dozens of PHD-holding austrian economists and contrarian investors recommending gold and silver (proven historically to hold its value during fiat-”money” collapses) are all “nutcase”s?  i suppose i’ll dump the history i’ve absorbed and professional advice given by Ludwig von Mises, Murray Rothbard, Doug Casey, and Gary North for what “Joe” calls a scam.  Come on, man.  Even if Americans were forced, due to economic collapse, into homesteading and trading a goat for a new boiler, that won’t last long.  There’s a reason gold and silver has come back in force, time and time again, as a medium for exchange.  You think we’ll be stuck in the stone age forever?!  Trading milk for an old rusty pitchfork?!  What if I don’t have enough milk?  What else is compact, pliable, durable, and rare enough to be used to fill the gap so I can buy that pitchfork?  Take a look around the world and see the demand in places like China, India, Turkey, Russia, and numerous central banks around the world buying up the shiny stuff.  I may have to go medium or long on this investment/savings, but in the end, I win.  Now I’m not saying don’t be prepared for an emergency with at least 6 months of supplies, including food, guns/ammo, farm and building equipment, and hopefully a good small community you can lean on when SHTF (if you are living in Europe or the US.)  What I’m saying is that somewhere in the process of getting on our feet, we’re going back to sound money for filling in the gap and ease of transactions.  Central banking fiat money is toast.  So during the mania phase, i will trade my international mining stocks and very liquid, allocated gold, for not-yet worthless currency (or direct with gold/silver) to make another trade.  Return on investment will be phenomenal compared to holding onto a tractor and a goat and praying to Odin for an overnight collapse.  I could buy plenty of what i need WHERE i want to buy it.  But I will be playing the next market.  That is investing.

  • dan

    tim – i find much value in articles in yours and the ones by simon black – we have
    tried to contact him for persmission to use his from time to time in a monthly
    newspaper we have in eau claire wisconsin (eauclairejournal.com) – as with simon,
    we request persmission to reprint what you wrote on silver, etc – it would enlarger
    your redership also – thanks for your consideratioin – dan stanley at the eau claire journal

  • kevkos30

    I own some SLV in an IRA account. Should I sell it? Should I cash out my IRA and pay the penalty? It’s pretty steep. Otherwise, I have no idea what to invest that money in if not silver or gold ETFs.

  • G Mac

    Morgan Silver dollars…all the way…non reportable because they qualify as a collectible. Also, when all hell breaks loose the dollar collapses, are you going to chip a little silver off your silver bullion…By the way, which is tracked by the IRS if you sell it.

  • G Mac

    Another scam about Silver and Gold certificates is that you have no formal ownership of the asset. If you read teh prospectus for any gold or silver certificate it states you are LEASING the gold or silver…..mmmm…RIP OFF

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