The Best Silver Investment

May 8, 2000

I've developed a bad habit lately - I don't answer a lot of my e-mail. I feel bad about it because I want to answer, but I can't. That's because the e-mails invariably ask specific investment advice, or questions concerning specific investment firms and securities. I don't know you, I don't know your financial condition or temperament, I'm not licensed or compensated, I don't want to. But that doesn't mean I'm not passionate about what I write and that you shouldn't follow your own common sense when it comes to investing. I certainly don't want to see anyone get hurt investing in silver (this piece isn't about the shorts). And I would like to respond to the questions that share a commonality.

If you decide, or have decided, to invest in silver (the actual metal, on a cash basis), what's the best way? Yes, I'm implying there can be only one best way. For a total investment of, arbitrarily say $10 to $20 thousand, or less, the choices are many. Rounds, bars, bullion and junk coins are available for personal possession. There is unlimited information on the Internet on the mechanics. Common sense is the rule of the day. But for the more substantial investor, someone who can afford to invest in increments of $25 thousand, there is a decided void. I have yet to uncover unbiased information on how a substantial investor would go about investing in the best silver vehicle. Much more importantly, this article is primarily aimed at the investor who has substantial amounts of silver in other than the very best form - COMEX registered warehouse receipts. For these investors not to switch to COMEX silver receipts immediately, could amount to financial heartache later. And for no good reason.

Why am I suggesting what some might call a paper investment in silver? The answer is simple - you get too much for your money at the current price of silver. You get so much, in fact, that you must think first of where you will put it all. At $5/oz, a $25,000 investment will weigh 350 lbs. $100,000 equals 1400 lbs. $1,000,000 equals 14,000 lbs. Where do you put 7 tons of metal? Logic dictates you must employ a storage mechanism. I contend that COMEX warehouse receipts are the best storage mechanism. Let me tell you why, and how to secure them.

COMEX silver warehouse receipts are at the center of the silver universe. They are the core upon which all worldwide silver trading is based. They are the antithesis to derivatives, yet they are what all silver derivatives emanate from. They are the real deal. No other certificate can make that claim. Modern silver history revolves around them. The Hunt Brothers dealt in them, and it was the source of Warren Buffett's purchase. For such a central role in the world of silver, COMEX warehouse receipts are vastly unknown. They are the ultimate storage mechanism for silver. Here's why - they are the cheapest, safest, most liquid and most flexible form of owning silver. In addition, they can offer important tax advantages. It's not often that someone can advance so many superlatives in describing an item that's traded worldwide. Let's see if I can back it up.

COMEX silver receipts are bonded warehouse certificates covering 5,000 try ounces of .999 silver, give or take 10% weight variance. They cover five 1000 oz bars of silver, with the serial numbers separately recorded. (There is also a 1,000 oz contract traded on the Chicago Board of Trade, but that contract is much less liquid). The COMEX silver contract is the industry's standard unit of trade. When the shortage of silver becomes obvious to all, the shortage will revolve around COMEX warehouse receipts. Think about that. There will be no shortage of futures contracts, option contracts or any other piece of silver paper. How could there be a shortage of paper contracts? There will be a shortage of the real deal - COMEX warehouse receipts. That's reason number one for owning COMEX receipts, if you're going to own silver - own the item that will be in greatest demand and shortest supply. Paper contracts can be created at will, COMEX warehouse receipts can only be created by bringing in real metal. Right now, there are a little over 100 million ounces of silver in the COMEX warehouses, representing approximately 20,000 warehouse receipts, worth roughly $25,000 each at current prices. The total value of all the real silver at the COMEX, the largest single inventory on the face of the earth, is half a billion dollars. Take a minute some day, and thumb through any issue of the Wall Street Journal, looking only at the tombstone ads and deal announcements. You will see how small half a billion dollars has become in the modern financial world. (Some may argue that Warren Buffet's pile is bigger, but my contention is Buffett leased out all his silver, and now only owns paper obligations. Ask yourself where the 30 million ounces of registered silver, recently moved into the COMEX warehouses, came from? I'll write about this in a future article).

Please keep in mind that when I say there are 20,000 silver warehouse receipts in existence at the COMEX, I am not for one minute suggesting that all are available at current prices. Each and every one of those certificates is owned by someone. Each one of those current owners has their own price at which they might sell their certificates. A great many have already been sold, via corresponding short futures positions. No one knows what the release prices are for those receipts that are unencumbered. So, in reality, the number of certificates available for sale is much, much less than the 20,000 receipts that are visible. Just because you can see it, does not mean it is available. (Is every attractive piece of real estate that you see available at a price you'd like to offer?) Silver, after all, is a vital industrial material, in addition to being an age-old investment vehicle. It is not just individual investors who own these certificates - be sure that industrial consumers and dealers own a big chunk. My own personal instinct tells me less than 1000 silver warehouse receipts are available at current prices. In a world where asset values fluctuate in amounts measured in the trillions of dollars, I think there is less than 25 million dollars worth left, that is available for the very best silver investment vehicle, at current prices. Let me be clear, if you decide to switch into COMEX silver warehouse receipts, do not delay.

Since COMEX silver warehouse receipts are at the heart of the silver world, from which all other silver prices flow, by dealing in these certificates, you are assured of getting the very best price when you buy or sell. There are no mark-ups, mark-downs, or added margins. It is hard to get ripped-off on price when you are dealing in the source item. You won't find you face a big premium when you go to buy, or a big discount when you go to sell, like you might with any other form of silver. The premiums and discounts are based on the COMEX warehouse receipt price, they don't apply to the source item itself. In fact, if you study the past and recent history of precious metals, you'll see the premium item will be exchange warehouse receipts. Think about it - what could possibly be more valuable, or trade at a premium to an exchange warehouse receipt? For that reason alone, why would anyone (barring unawareness) who had the choice, own any other form? If you own a non-COMEX silver certificate through a commercial bank, in a dramatic price rise, don't be surprised if they won't match the COMEX warehouse receipt price. Then, what are your alternatives?

There are many other advantages to owning COMEX warehouse receipts for silver. The transaction costs are minimal. It shouldn't cost more than $100 to buy or sell one, or less than one half of one percent at current prices, much less as prices climb. You can hold it as long as you want, with no tax liability until you sell (these certificates are not subject to mark to market rules for individuals and could qualify for long-term capital gains treatment - see your tax advisor). It will cost about $200 a year for storage and insurance per certificate. Your only other real cost is the lack of interest income, or opportunity cost for the funds deployed. Perhaps the simplest way to look at these receipts is like one would look at a stock. It's like buying a 5 dollar stock you think might go to 50 or 100. While I can't guarantee the price will go up, unlike a stock, it can't go bankrupt. And, if the need develops, they can be borrowed against.

How do you go about securing these receipts? Let me first warn you - for the average person it's a pain in the butt, but well worth the pain. The first thing you need to do is establish a commodity futures trading account. As a substantial investor, chances are good that you already have an established relationship with a full-service broker, for your securities dealings. Go to them first. You will have to sign all sorts of forms warning you about the perils of commodities futures trading. You will be required to disclose detailed personal financial information that you'd rather not give. There is no way around this, it's required. You can't buy a COMEX warehouse receipt through your regular securities account. By opening the commodities futures account, you are not required to trade commodities wildly, but you must first purchase a COMEX silver futures contract, in order to get delivery of a warehouse receipt.

That's the way it works. Your current securities representative will undoubtedly be unfamiliar with the process, but be patient and understanding. He may even try to talk you out of the transaction, due to that unfamiliarity. That's human nature. Please don't let it dissuade you. (While I won't answer investment questions, if you or your representative needs further mechanical guidance, e-mail me, but please have him read this article first). Deposit the full cash amount for the number of certificates you want, and wait for delivery. You may leave the certificates on deposit with your broker. You must keep the commodity account open, in order to sell someday (although if you wanted you could sell the certificates through another broker, but you would have to establish a new commodity futures account again). The sale is the opposite of the buying transaction, you sell a futures contract and then make delivery. By owning the warehouse receipt, and having established a commodity futures account, other possibilities come into play. For instance, just like happened in NYMEX April Platinum a few weeks ago, if a spike in the delivery month occurs in silver in the future (a good bet in my opinion), you could switch out at the higher spot price and into a new futures contract, and start the process all over. (I'm not talking of considering doing this for pennies per ounce, but dollars per ounce. This is not a recommendation, just an observation - the risk, of course, is you may never get your certificate back. The point is to highlight the possibilities.)

If your current securities dealer, doesn't handle commodities at all, you'll have to establish a new relationship with someone who does. It's more of a pain, but consider this - this transaction does not involve high commission costs, so it is not a transaction that will be initiated by the broker. You must understand this and act accordingly. You are asking someone, in essence, to do you a favor. Be prepared to be patient and call a few before you hit on the right one. It is your responsibility to establish the relationship. I'm talking about the best silver investment vehicle in the world. It's the most liquid, cheap, best price, safe and logical way of owning silver in size. It's everything except easy for the first time. What'd you want easy too? Here's one more advantage. When silver hits $50 or $100, the COMEX contract will be lowered to 1000 ounce units, as it will be too hard to trade contracts worth $250 or $500 thousand. (Just like the current 5,000 ounce contract was split from the old 10,000 ounce COMEX contract). When that happens, you will get five 1000 ounce warehouse receipts for every one you may own. It will give you greater flexibility when you decide to sell. Also, please keep in mind, these warehouse receipts can be bought by anyone in the world, it is not strictly a US item.

Those that are positioned in COMEX warehouse silver receipts when the shortage becomes known, will reap rewards beyond comprehension, just as those short physical silver will be destroyed. You see, the mirror image of the best silver investment in the world, COMEX receipts, is the worst silver investment in the world, a short physical position. I guess that's the way it must be on a mathematical or mechanical basis. What makes one so good, must make its opposite so bad. But what I don't think anyone, including myself, really appreciates is how quickly this will unfold, once the shortage is apparent. And no one knows when the shortage will hit - no one. All that really means is when the moment of truth arrives, tomorrow or next month, or whenever, we'll all be shocked at what unfolds. We are talking about a vital commodity in a structural deficit, with no remaining inventories after 4000 years of continuous production, and a stupidly large short position. The coming price surge will be so violent that it will literally cause heart palpitations and suck the breath out of those who are long. The major mining companies who are short physical, via leases and forward sales, will be bankrupt in weeks, if not days, adding to the supply shortfall. In this environment, why would anyone own anything but the best?

May 8, 2000

The Fourth Coinage Act of 1873 embraced the gold standard and demonetized silver, known as the “Crime of 73”