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.