How does one "hedge" the silver run-up?
razzle
Posts: 987 ✭✭✭
Whether one believes there will be a correction or not, the kind of run silver has had suggests that those holding tangible silver, coins or bullion, should have some kind of hedge or "stop loss" in the event of a correction. I know there is a SLV etf which could be shorted but it is expensive to watch go to zero every quarter. Any ideas?
Markets (governments) can remain irrational longer than an investor can remain solvent.
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I bought most of mine when it was under $10, but am still buying right now. If it drops, Im sure I would not be too happy, but then again I still own the stuff. There will always be another cycle.
If a person still wants to do something, perhaps trade some bullion for numismatic bullion coins that might suffer less if there is a downturn. I'd be hard pressed to name that kind of numismatic right now so the right deal has to be available. Maybe if a person could find seated liberty coins for near melt value, that would be a good hedge against downside because they will have numismatic value if silver cools down. Another example might be if a person can find VG or better Barbers for melt value that would provide a minor hedge. Same with slightly better silver proof sets in outstanding condition. They might be found for melt value, but might go down less if silver takes a dive.
Note: talking about back dated silver eagle prices.
If a correction happens, silver will get killed compared to Gold.
Edited to add: but you still have to stay with PM's because it'll only be a somewhat temporary correction.
"“Those who sacrifice liberty for security/safety deserve neither.“(Benjamin Franklin)
"I only golf on days that end in 'Y'" (DE59)
Bigrick, I'll do a hypothetical tomorrow.
"Interest rates, the price of money, are the most important market. And, perversely, they’re the market that’s most manipulated by the Fed." - Doug Casey
In the stock market, you can hedge by selling covered calls, or by buying put options.
In the casino playing craps, you can have a few lay bets going when a shooter seems to have been rolling for "too long."
but how do you hedge a physical asset that you buy and hold such as silver rounds, coins, bars?
I guess if you have some doubts you can start to sell and take some profits, but use the LIFO method first (last in first out) to minimize your taxable gains as you unload your holdings.
question: what would rise in value if silver drops in value? you could buy that.
another option would be options on silver mining stocks perhaps?
www.AlanBestBuys.com
www.VegasBestBuys.com
Personally I dont worry about dips or corrections. My stack was built as an insurance policy and im in at $18-$20 or so. I have what I think is a large exposure for my personal situation, but it wont bother me even a little bit if silver dropped back to $30 or so. Im not in it for short term, quick profit. If I was though, I would be worried about dips and/or corrections.
If you in @ $30-40oz sell down until comfort sets in. If you just plain scared get out 100%.
Joe Lustre has a savings portfolio of $100,000 at age 60. When he acquired his silver holdings, mostly pre-64 US coins and modern commems, they made up less than 3% of his $100,000 nest egg. With current silver appreciation, the coins are now worth $20,000 melt, making up 17% of his total portfolio worth. Joe didn't necessarily set out to have the gradual acquisitions of coins become an investment vehicle, but neither can he afford to ignore that it has become so.
In direct answer to your question, BigRick, let's say, a guy with a limited investment horizon (age 60-ish) with an asset that has suddenly appreciated to become 10+% of his available nest egg capital, but also has great potential for further upside. That is a lot of exposure with little time to recover from any sudden reversals.
I ask because I think that whether we like it or not, whether we are in this only for numismatic interests or not, the silver appreciation forces all of us into PM speculation (the exception being those wealthy enough that one asset class makes little difference).
I know that redtiger has given some ideas here and above in the coin forum which I like. What say you?
What percent of his portfolio (that is tied up in silver) would he want to hedge?
I'm not sure what $20k in face 90% is in ounces of silver (400???) but some easy cost effective ways would be to sell mini-futures or ETF's equal to the % of the position he wants to hedge.
Another less perfect since he seems to have less than 5000 ounces is to buy a put or sell a call. Both work similarly for hedging purposes but buying the put gives complete protection below a certain point & requires a cash outlay (like an insurance policy) whereas selling the call provides limited downside protection but brings cash in further increasing his yield (or reducing his decline in value should silver tank) but he runs the risk that the price of silver surpasses the strike price of the short call.
The investment industry, in their zeal to extract commissions and fees from Joe Lustre - has always tried to promote ways to increase portfolio turnover. Stockbrokers have always been notorious for this. They've been brainwashing the investing public with this concept as long as I can remember, i.e. buying "the dogs of the Dow", etc. The whole idea of reducing a performing asset in order to load up on some other doggy investment that might be "out of favor" is not necessarily the best idea. "Portfolio Rebalancing" is the term they use . This idea automatically guarantees that if one of your best investments is doing well - you chop off it's head. It also implies that you will make a better choice for those funds, when a better choice may not be available.
There's no doubt that silver will correct at some point. That isn't the issue. The issue is what will happen to silver AFTER THAT.
If you think it's prudent to broadly diversify across various asset classes in order to reduce your portfolio's market risk, that is a cheap way of trying to make sure that your portfolio doesn't gain or lose much. Even that strategy has a variety of shortcomings, depending on exactly is IN that portfolio and the wisdom of that strategy also depends on how the investment environment is changing and in which direction. How has the rest of the portfolio been doing?
If you sell the silver for a profit, you should also sell one of your losing investments having a loss that is equivalent to your gain in silver - to zero out your tax liability. At least you'll be getting rid of a loser at the same time - and you'll avoid unnecessarily trashing your capital position for the sake of a quick profit.
Just a contrary opinion here.
I knew it would happen.
A person can hedge with SLV puts, but it comes at a cost. Current cost for puts is about 40% of principle for one year's worth of protection for twelve separate one month, at the money puts. If silver doesn't move for one year, the hedger that buys puts every month will lose 40% of their money. I don't see how paying that rate for insurance makes any sense for a small time stacker, though it does permit further upside.
A person can hedge with futures, but that locks in today's price. Might as well sell the physical as sell futures. The futures add nothing. There is no further upside if a person sells futures. All a person has done is add another layer of paperwork, taxes, commissions and spreads. Selling futures might be appropiate for a coin dealer that has to have stock on hand to operate their business. They lock in a profit on their current inventory, and still have coins or bars on hand to sell to the public. Selling futures makes zero sense for a small time stacker.
As for rebalancing, those that follow the Vanguard methodology of choosing asset classes, and low cost indexing, will typically be in the top 25% of active small investors. Maybe 15% of small investors choose this route. Some might want to be in that top top group with way above market returns. Indeed, top performing investors do very well, and some make huge money. There are entire forums devoted to the Vanguard way. It doesn't need any more advocates, and an active options trader like me is not the person to be carrying that flag. This is not the time or place to argue those points. However, especially for young people starting out, the odds are good, the method is sound. What a person mostly gives up is the excitement (and the aggravation, and the likely disappointment).
While the top investors and traders do very well, the average person that tilts heavily towards the best performing asset classes tends to do poorly. Why is that? It is how markets work. Markets form tops when there are a relative maximum number of buyers, relative minimum of sellers. No amount of analysis can change the way markets function. At the top of any bubble market, be it real estate, dot-coms, banking stocks, a huge percentage of folks get in at high prices and suffer huge losses when the bear market comes. During any major market top, there are a boatload of folks that get in near the highs, that's what made the highs happen. Very few get out, because if lots of folks are getting out, there is no top.
Yes, a few players will get out near the top. Maybe the smartest 5% of them. Maybe another 5% will get lucky and happen to need money during that time. Again, I'm not saying this is a top in metals. In fact, I'd say the opposite, this doesn't look or feel like a major top in silver or gold, not yet. That said, a person with a load of silver can certainly take some off the table and be happy with that. I often write that predicting tops is a low percentage game, so the odds of them getting out at the top are slim. Those that want to sell or think they now have too much, sell a little at a time and be happy with an average price over time.
RAZZLE,
I faced a situation not unlike yours. I'm 58 and wasn't sleeping as well as I'd like with PM's moving as fast as they have been. Last year I started looking around for some land, believing that some income producing land may be undervalued. The run up in silver allowed me to close on the land with unexpected profits taken from PM's. I'm continuing to thin the herd by purchasing small lots of collectible coins in the $100-1000 price range from several dealers, sight seen. I've been collecting for a long time and good quality coins seem undervalued. It's nice to be able to buy them at effectively half price from last year by purchasing them with gains from PM's.
I believe that the gains on certain land over the next ten years may outpace PM's--plus the land does something silver doesn't ---it gives me a negligible yield and I don't have to guard it.
One thing I've noticed over the last 8-9 years when I started spending a fair amount of $$ ---and took a lot of grief over that spending----was slightly better date, unc, pre 33 gold used to be really common. I never even thought it was important to buy the slightly better date stuff but I knew that lower pop's were better pops if it ever became collectible. It still may not be collectible but it sure has disappeared from cabinets. I'm a believer in holdered generic and slightly better date gold for the long haul. Not the low grade generic that the wholesalers pump out---but stuff with nice eye appeal and solidly graded.
regards
Lots of good info in this thread
Great point, because those ARE the hedge against something else(paper assests). Maybe the OP is working backwards?
I don't know what this is?
<< <i> sell a YI mini silver futures contract. >>
Is it just a typo for "SI"?
I have not considered a silver futures contract, only some type of play on SLV (puts and call are too expensive).
In a futures contract, I would be locking myself into a price with a ceiling on the gain, if I understand it right? I don't think I have enough silver that I want to do that with a significant portion of it, especially since I think there is greater probability that silver will be at $80 than $30 by June. I'll have to think about it.
Thank you again. I hope to spend some time reading your blog later this week.
Chuck
<< <i>Proofcollection,
I don't know what this is?
<< <i> sell a YI mini silver futures contract. >>
Is it just a typo for "SI"?
I have not considered a silver futures contract, only some type of play on SLV (puts and call are too expensive).
In a futures contract, I would be locking myself into a price with a ceiling on the gain, if I understand it right? I don't think I have enough silver that I want to do that with a significant portion of it, especially since I think there is greater probability that silver will be at $80 than $30 by June. I'll have to think about it. >>
YI is for a 1000oz contract, SI is for 5000. But yes, if you owned 1000oz and sold a short YI contract, you would essentially break even on any subsequent price moves - ie, hedging.