Long Term Silver Investing in Your Self Directed IRA

I do some short term silver investing, but I am phasing it out.  I have made as much or more on my long term silver investments over the last few months as I have on my short term investments. My short term investing is in the form of options—I like the leverage.  But because the price of silver has been so volatile, the premiums on options are very, very high.  When I happen to buy call options a short time before the price of silver pulls back, I stand to lose a considerable portion of my investment.  That is because, even though I am confident that the price of silver will come roaring back, during the time it takes to do so, the premium I paid deteriorates.  Even if the price of the leveraged silver ETF or silver mining stock comes back to the price it was when I bought the options, the value of my options is less that I paid due to the time deterioration of the premium I paid.

All of my silver investing has not been short term.  In late 2010 I owned some 2012 LEAPS, and in early 2011, I rolled to 2013 LEAPS. Of course, as expected, since the premiums on options with six-month expiration are very, very high, the premium on LEAPS is very, very, very high.  I noticed that the profit on my LEAPS was as good as my shorter term options, and I have no qualms about holding them through a correction in the price of silver.  In previous posts I have written about the reasons the price of silver will experience a multi-year bull market, and why I believe silver will vastly outperform gold.   Nothing has changed.

silver investing chart

I think the easiest way to invest in silver is by buying an ETF (Electronic Traded Fund).  I like SLV.  It has been around awhile and has plenty of liquidity.  The target share price of SLV is the spot price of silver minus operating costs. I do not own shares of SLV, because as previously mentioned, I like the leverage of options. An advantage to trading options on SLV is that LEAPS are available. And while the premiums are high, the deep-in-the-money strike price LEAPS have considerably less premium.  For example, at time of writing, the share price of SLV is $39.86.  The ASK on a 2013 call with a strike of $25 is $16.50 per share = $1,650 option cost because an option represents 100 shares.  The difference between the $25 strike and the share price is $14.86 ($39.86 – $25). So the premium is $1.64 per share.  But to control 100 shares until the third Friday in January 2013, the cost per share is $16.50 instead of $39.86.  The leverage through the LEAP is 2.4 to 1, or, stated another way, 240%. Since the $25 strike price is so deep-in-the-money, and the resulting premium is so small, the value of the LEAP option will move pretty much the same as the share value of SLV.  That is, if the price of SLV moves up $1over a week, expect the value of the 2013 25C to move up about $0.95.

If you like leverage but do not have option approval in your account, there are two other options.  One is silver mining stocks. Producing mines have a relative stable cost of extraction.  So when the price of silver goes up, profit margins also go up.  If you decide to buy stocks, I recommend you stick to those with proven reserves of silver, and not gamble on the exploration stocks.  The price of silver over the next decade is going to explode upward.  Why gamble on exploration companies?

Another means of gaining leverage on the price of silver without buying options or mining stocks is the leveraged silver ETF.  The leveraged silver ETF that has been around the longest is AGQ, Proshares Ultrasilver.  It is designed to move, on a daily basis, at 200% of the price of silver. If the price of silver gains 1% today, AGQ will gain very close to 2%.  Of course, if the price of silver drops 4% tomorrow, the value of AGQ plummets about 8%.  It’s a wild ride.  But since AGQ is an ETF, there is no expiration as there is with options.

The risk with leveraged ETFs is in sideways markets.  They tend to have some slippage.  AGQ does not own silver bullion as SLV does.  It uses options and other instruments to attempt to return 200% of the price move in silver on a daily basis.  If silver isn’t moving much, slippage can occur.  While I have some concern about slippage on a leveraged gold ETF, I’m not worried about slippage on leveraged silver ETF.  Look at the 5-year chart again.  We’re just getting started on this long term silver investing trend.

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