Saturday, August 20, 2011

Guest Email: To leverage or not to leverage?


I started following your blog about a year ago, since then your site along with others such as Sprott, KWN, Keiser and Zero hedge have replaced Facebook. I’ve been slowly building my physical inventory however, I’ve recently felt a bit more pressured and was hoping you could lend some advice. I currently attend the XXXXXXXXXXXXXXXXXXXX. Last year the government allowed me to see a whopping $200 dollars a month from my approximate $900 paycheck. Starting last month I now see $300 a month. I know that seems like nothing but through saved money and other investments I’ve actually been able to pool a bunch of physical. This September I have the ability to take XXXXX “Career Starter loan.” A $36,000 loan at 0.75% that won’t start accruing interest for 2 years. In two years when I am done with XXXXXXXX, and commissioned I will owe approximately 5 years of service at which time I start repaying the loan.

Now…unlike my classmates who will throw their loans into mutual funds because the bank representative told them it was a good idea, I was planning on buying more physical. I was wondering if you would be able to offer some advice as to whether I should throw the majority of it into physical or if I should do less physical and try to grow some more cash through mines, options, etc. before purchasing more silver. My main concern is that I do not see the loan until mid-September and as we saw silver finished the week pretty strong. I’d like to avoid paying $50 an ounce in 4 weeks. I should be able to barrow around 5,000 next week from a friend before I get the loan. Would you recommend trying to grab some more physical this weekend or next week in order to get some more silver before mid-September? Any thoughts on how I should divvy up the 36,000? I understand you are not blogging to manage other people’s money I was just looking for some thoughts.

On a separate note I owe you a huge thank you. Your site has literally taught me more than any of my economic classes thus far. I thoroughly annoyed a teacher of mine last semester when we covered currency and economic policy. He did not appreciate me challenging the US dollar as printer paper nor did he like when I referred to Ben as “the bernank”. Keep in mind this instructor told the class oil was $60 a barrel on a day when it reached $114. On the other hand I have been able to pull a few others over to silver. We did a large joint physical buy and it was like Christmas morning when we divvied up our coins and bars. Thank you for the continued education.




Well, I thank you for the kind words. Although I am not going to answer your question directly, as I am not aware of your circumstances, I will tell you this: Borrowing money to invest into anything OTHER than physical usually turns out in disaster. Physical will always be a wealth preserver so its different. That being said, I'm not sure whether you are trying to make money or preserve wealth, or create it. Thus my vague answers.

I always encourage the growth of the physical stack, ultimately its up to you that will determine with what means you will purchase it with. Maples are already in the high 40's, I think you will find out shortly whether to buy higher or lower as next week should be the week that its clear enough to see.

I leave the floor up to some comments under here to help you further make an educated decision in your quest for the million dollar question. Let me know how it went and looking forward to the follow up email a week before Xmas(not sure if I'm allowing to type 'Christmas' anymore so I have to abbreviate it as I may be on the AIPAC/ADL hit list).


  1. It seems pretty clear from recent price action (last 3 months or so) that TPTB WILL take down one of the precious metals by 10% or more after a runup. Comex tried to do that with gold via margin hike, and got about a $50 response. I am personally waiting to by a monster box with some 18-month 0% balance transfer money my credit card people keep asking me to spend.

    Or, if gold gets whacked down to $1700 or so, buy some of that. I have far less physical than I want to have, but I'm not in a cash position to buy more without leverage. I, however, will be looking to lever up if silver takes a whack.

    That's my .000465 ounces worth...

  2. I can relate.
    I was living at home after graduation, working full time, after 2 years I had saved up 50k and me and the old man were ready to kill each other, two alpha males cannot share a house...

    I decided to get a small house, 5% down, and sink the other $40k into bullion.

    That was several years ago. Lets just say that the 4% interest was hugely offset by the 80-130% annual gains on bullion.

    Rich dad once said, you make your money in the BUY, so buy at a good time, when SGS tells you lol.

    0.75% interest rate is a joke, just make sure you don't live too high on the horse and have to sell your physical.

  3. Two words: Debt Jubilee!

    I know people that are betting on it! It has to happen the system can continue.

  4. Just received an interest free for 21 months offer from Citi on a credit card with a 10k limit. Working on stacking more right now. Have used home equity loan sparingly also to stack physical as the interest is tax deductable. As long as your not paying interest on any other debt like a car or credit card I would ease some of that money, about a third, into pm. But not a penny till the high interest debt is gone. Then dollar cost average the rest and keep an emergency fund in cash. My two cents.

  5. I'll add another two cents...
    I think SGS's advice about using CC money to buy physical and NOT leverage into any options or futures trades is sound advice. Physical is physical. It is reasonably safe to borrow and buy it. We do it with housing all the time. Just make sure you can afford the payment!

    Borrowing to do leveraged trades or to trade at all in this manipulated market would be ill-advised. One mistake and you could get a margin call. Its gone! Been there, done that (not with borrowed money though.) And you will still have to make that payment. Only trade with fiat you can afford to lose, and if you shadow trade SGS here, you will do alright.

  6. About a year and a half ago, I sold a lot of my toys.. Jet Ski, RV, trailers and such..I turned them all into physical Silver in the 19.00 dollar range. It was a good start, but not enough.. I sometimes pick up things I know I can make a profit on and resale them, and turn profits into silver.

    Our house was about paid off, but I had some debt from my business and I rolled it all into one payment.. A new mortgage on my house . My payment is about 600. a month, which I'm used to. Freed up other money on those other payments, And bought another fifty thousand in silver in the very low twenties.. And I try to buy some in small quantities, every week..

    I'm not a stock trader, it's not my talent.. And I know I would be dealing with a bunch of crooks! Each week the Phyzz pile grows..

    Personal opinion, I believe Silver has been Far more Manipulated than Gold. And the prices we are paying today will be laughed at (by Us) probably pretty damn shortly.. I wonder every time I go into the coin store, will this be my last ! I don't sit around and Gamble on the time that this Ponzi Scheme blows up, and the Sheeple, go on a buying frenzy ! I will be chasing other things while there doing that.. I think it will of been wise to have built a friendship with my coin dealer who is local.. When the SHTF Plus there is no damn Paper Trail.. I will be dotting all my I's and crossing all the T's !

  7. SGS,

    Saw the short interest on SVM has gone parabolic. What do you think about the Dec calls?

  8. My advice...doing loans to invest into something, especially if it is paper, is always risky. However, these loans can pay off if you make well calculated risks and understand the markets. For example, a business loan is technically an investment loan, but the results don't always end up positive.

    As SGS says, your goals are unclear and thus your answers will be unclear. If you are looking for a quick buck, I would suggest buying the physical or if you want to pseudo-emulate the price movement, Eric Sprott's physical trusts are good. I've had them since May and I've cashed out quite well...getting my new car Wednesday.

  9. lemme ask you guys a question????

    do you have loved ones and pals who actually care about you telling you to sell your gold and silver all the time, that it's peaked, and "pigs get slaughtered" etc etc??? ... I know they mean well, but geezus, they have not studied it .000001% of what we have ... It's annoying but like I said I know they mean well, and when I take a deep breath to talk about Bernank, JP Morgan, FRNs, et. al, I find myself not even wasting my time anymore ...

    It's like some dumb-ass housewife telling me how to coach hoops after me being around the game 45 years.

    how can people have the audicity to toss out their opinions on shit they don't have clue one about?? ... ah well, I learned my lesson on that long ago ... pipe up when you know your shit, otherwise sit back and observe ... It takes a lil practice or common sense but my gawd, the dolts that expose themselves are classic :)

  10. I hung on as long as possible with Nortel, a Canadian innovation giant. Too bad we had a dozen bastards who killed the icon. I'm too old to start over so we will be selling the house and moving to North. I Guarantee I will buy another $10K in Gold and Silver, a safe, and a large caliber weapon. The situation in Canada is okay today but the banks are over leveraged and when the SHTF in the EU or US, Canada is toast (Big 5 banks have +$16 Trillion in notional value derivatives). I'm udda here the risk is just to significant. Just look at our ass kissing PM and Baird - that's enough to scare anybody into drinking 24/7!

  11. OC15: Fuck these assholes. They will get hammered. I got nothing but time. I will hold, $8 is solid floor unless POS goes to $33 again, which I dont not see that happening.

  12. Here's an example (didn't happen to me, but something similar almost did, and I'm still scarred from it. Heck, I'm still scarred from May in general).

    Let's say it's April 1st and you're witnessing this historic run in silver, which is trading at 38, and you think by June it's definitely going into the 40's, so you buy the June call options at a strike of 40. Then you watch a crazy run up to 49 and you can't stop thinking about how high it will be in June. Then, in May, all of a sudden, it drops to 42, but you think it will go back up, so you don't cash out. And it does. But then it drops to 39, and you think the fundamentals are too strong. It has to get back into the 40's by June expiration. It HAS to. But it doesn't. It drops to 32. Then June rolls around and it never touches 40 and your options expire worthless. Buy the physical.

    Put the majority of what you are willing to invest into physical. Under NO circumstances get involved with futures (when the Australian take down happened I had 4 mini-contracts locked up (because they don't open until an hour and fifteen minutes past the full silver market and until then I had no fear of leaving a position on overnight). Luckily, I came home in time to save myself by shorting a full contract for the last dollar of that move, but that's how quick it can disappear--ten minutes).

    You can buy options, but ease into it. Don't wait for expiration. Take your profits after a good run up and wait for the next dip. You never know when the margin hikes will come and you'll be locked into a position, pacing until 9:30 rolls around, watching your profits turn to losses. We're going to see ridiculous price swings over the next few years. Build a little bank roll, pay back your loan, and play with the profits. Don't be greedy. You're not going to catch every cent of the move. Take bites out of it when you can and be happy that you're aware of what's happening. Paper games can evaporate in a heartbeat. The physical will not. Any trader who is still trading will tell you risk management and taking profits is the name of the game.

    Oh, btw, personally I think QE3 will be timed so the peak will coincide with next year's election, which means it needs to start several months later than last year, but who knows, if the markets have a tough week, maybe it will come out of the Hole. Good luck.

  13. Jeff- Good point on QE3, when does that mean it would start? About Nov.? I'm just wondering whether they can hold off that long. Everywhere I go people angry as all get-out. My friends starting to sell their old gold jewelry...I'm gonna switch mine to bullion, lol.

  14. @Colin - I am having the opposite experience. I have family calling me about not selling their gold neckless or about what type of coins to buy. They all thought i was crazy when I went all into phyzz in 2009. Now they are beginning to think I'm on to something. Except for early withdraw of my IRA, but time will tell. I even give silver rounds for Christmas, birthdays, or new babies. Help them bring up the conversation without me pushing my beliefs on them

  15. Take the silver....hold on. In 2 years sell half to pay off your debt...easy peasy

  16. I went to a community college for my econ micro and macro. I was lucky to have my professor be the head of the econ department and he has 40 plus years of flipping between private and public work. He never needed notes, never needed to even crack the book. He had the subject matter down harder than any other teacher I has ever seen in my life. In class, it was the status quo. I stayed after class when the money multiplier and definitions of money/money supply came in. after class I got the all knowing slight nod that I was right to question this BS. I pressed on and stated that it is going to get a hell of a lot worst and the Fed needs to be dissolved and it is evil. He did not challenge me at all on this. This person could have pulled a hundred quotes and examples to put me in my place. He did not; he retired after that semester and left the country.

  17. Last Jan/Feb when silver dropped to $27 or so, I took out a big loan and bought a lot of physical silver. I wish I had borroed more. I'm still paying it back, but I'll be done soon.

    Personally, I think it is definitely a smart idea to borrow to buy physical IF you are able to pay it back. Physical is a safe bet.

    I would NOT borrow to invest in commodities, stocks, or any other leveraged play. I recommend that you stay completely out of paper. Any paper investment can fail for many reasons. I trade commodities and mining stocks, but I would never borrow to do these.

    Physical gold/silver is much better than money in the bank. In a couple years you can sell a portion of your physical (if you want) and pay off the loan in full.

  18. I appreciate all the advice and comments thus far. I understand that I was being somewhat vague. Given my circumstances I am looking to both preserve what I have now and hopefully use this as a opportunity to make some money.

    Apart from the physical that I currently own I have some money invested in Sprott's trusts. I am planning on using the majority of the money to buy up as much physical as I can. I suppose after last week I was getting frustrated/anxious that silver was about to go before I could place another order.
    Jeff thanks for the insight, around that time last year I was contemplating dabbling in options. Once I saw the 49 get whacked so quickly I figured I'd maybe wait a little longer. Several friends of mine purchased some phyz around 47 and came running to me demanding an explanation for such a sudden drop. Since then I have been preaching and trying to teach myself patience.

    So depending on the circumstances I will try to ease into a little option trading and stock up a bit more on Sprott's Trust after I buy some more phyz.

    foofoojin interesting story. It's frustrating as when teachers clearly resist challenging what the politicians say and what the textbooks say when the math simply doesn't add up. The teacher I am referring to got all his material from powerpoints provided by the text and regurgitated the information. Unfortunately this also was the case in my finance class. An instructor was preaching to the class about mutual funds and happen to state that the only stocks with dividends were worth owning (everything else was absolutely worthless). He didn't appreciate when I disagreed. Education in the US is eventually going to burst. People pay absurd tuition fees (that increase every year) to listen to a teacher's assistant ramble about the "professors" book which was written 20 years ago. Add on the cost of housing,eating, and books and it just won't last. Last week two books cost me $400! and that's only for one class! WHAT ARE PEOPLE THINKING! And of course next year the publishing company will change the cover making a new edition forcing the next round of students to buy a new book. I find myself saying "well it's only paper" or "Dam that would have got me x amount of silver".

    Would love to hear anyone else's advice thanks in advance.

  19. (Also just to clarify...I will be able to pay off the loan I'm a Midshipmen at USNA after graduation when you are commissioned the payment of the loan is automatically taken from your pay, it's paid off by the time you finish your minimum years of owed service) Usually everyone takes the loan however most people don't really think about the money and blow it all on a car or in the bars. Thanks again for the thoughts

  20. SGS: Perhaps I am poor at reading between the lines. Are you saying just better to own SVM than screw with the options. Seems to me they'd be unwinding this massive short position long before Dec to cover especially with silver heading in the opposite direction.

  21. @SVP
    I'm also going into the business side for my little piece of paper that says I can follow directions very well(B.S).
    But I also have an Associates in mechanical electronics and some metal fabrication experience. when I'm done with the business side of things I'll be expanding back into computer science as C++11 and HTML5 should be entering the curriculum and the books and beta stage should be ironed out.
    The crazy part of this situation is grants. I know very "smart" people who won $10k grants and I keep telling them if it's free money just throw it into silver/gold. Someone needs to create a $5k grant where you have to argue why silver and gold will go up or down. 1000 word and advertise the hell out of it on all the scholarship web sites.... hmmmm I'm getting an idea...

  22. Typically American irresponsible logic to think that just because you CAN take out a loan for $36000,- then you MUST take out a loan for $36000,- That's the root cause of the economic mess we're in.

    Debt is the money of slaves, and in a worldwide economic downturn (i.e. crisis) I think it's foremost important to stay DEBT FREE!!

    The "experts" still can't agree on whether there will be inflation or deflation, so avoid the risk that in the deflation scenario you end up stuck with a big loan in order to pay for gold/silver which has deflated along with everything else.

    Buy physical with your SAVINGS, not with a student loan!!

  23. @SVP

    I'm studying Financial Services here in Canada, very interested in how the US teaches your stuff compared to the States. The Powerpoint thing isn't new (actually better for someone like me who prefers information quick), but a lot of teachers I've spoken tend to have incredibly different opionions. I've even mentioned Ron Paul to one of my ECON 101 teacher and what he thought about gold-backed currencies and his answer was along the lines "I don't like the idea of a commodity-based currency that can be manipulated by the elite" He actually suggested me to watch 'Secrets of Oz' to understand where he was coming from. I'm sure many will disagree with him, but at least his argument is better than "durr hurr barbaric relic"

    However...your finance teacher when it comes to the mutual funds scares me. If there is one common theme in my classes, is that you need to understand your client and need to understand the risks of the products you offer your client. I was never told that "one is better than the other", but rather "one is riskier and not suitable for a client over the other." One teacher described mutual funds as a 'bridge between the safe GIC investor to the risky stock trader', which I think is a decent analogy.

    So yeah...US education on the financial system scares me now after reading your post. And you guys pretty much control the world economy? Joy.

  24. "I'm studying Financial Services here in Canada, very interested in how the US teaches your stuff compared to the States."


    I hate Sunday mornings.

  25. Here in Europe, Czech Republic, mass media have started to publish articles about gold going up (they usu never mention silver).

    I'm quite lost what is the purpose of propaganda. Whether to get people into gold (why then?) or whether to make a feeling it is in bubble, therefore keep people far from metal.

  26. B I actually agree with your belief in american irresponsibility. However I believe that my situation and classmates situation is different then the average american college student. Currently every last bit of my saving has been put into physical. .75% interest is a joke. It wont start accruing interesting for 2 years... Unlike most Americans I WILL have a 36k loan paid off by the time i am 26. I see this really as a opportunity to generate some wealth for the future. With rising prices food, gas, etc I have to budget pretty well to make my $300 a month last. Again given my situation I can't get a job throughout the year or summer.

    MarkyX powerpoint can be a great tool however it has to be used properly. One thing that I've noticed that really scares me is how people are so easily controlled by what they consider the accepted norm (They really move like sheep). I'm talking about when people see something like the Social Network and decide all of a sudden they can trade futures?? People talk in class about how they are now "DAY TRADERS!" since they bought apple when it was UP!! a buck. They never seem to think that a $350 dollar stock may not be the best way to enter the market. But the media loves apple so they dive in. I see it with everything mutual funds to how people buy a car. Scary stuff...

  27. Sister, I also have doubts whether they will be able to hold off QE3 for much longer. I know they will TRY to time the best possible economy for the election. But I'm glued to the TV with my finger on the button every time Bernanke speaks.

    SVP, one more thing. If you get into options, but contracts with enough time for it to come back in case it drops. I generally buy the strike at the current price (either just in or just out of the money) and give myself at least 3 months. If it drops, have enough money to consider adding one and averaging down (but be careful--it doesn't HAVE to come back). I never hold until expiration. I use them more to day and swing trade with the limitation protection. However, more often than not silver and gold rise in overseas trading and it sucks to miss out on that, so I TRY to have at least 1 or 2 in the market and day or swing trade the others. The problem is the margin hikes come after hours, so it's a delicate balance of when to stay in and with how many. Ten days ago when they hiked gold I was stuck in 3, so I tried to short a mini gold overnight, but I screwed up the timing, lost faith, and made a mess of it. I did hold the 3 gold options and added 2 near the bottom and it came back nicely. This past week there was a nice run up, so I sold them all in fear of a margin hike and I missed out on Thursday night's huge move. But it's better to be safe than sorry.

  28. svp

    You sound like a very level headed kid. I'm a father of 9. Five out of College, and they are all collecting silver.. Four out of the five have had full rides in private Catholic colleges, and were not even Catholic... And they are not light weight degrees either.. My last daughter took grant monies and some very low interest loans, and bought physical silver when it was really dirt cheap.. She has almost tripled her investment in a Very short amount of time.. She just landed a job in a Pharmaceutical company, learning to make drugs.

    Makes me feel good to know that their are some Smart, Level headed kids out there..

    I believe the time is Short, before the Ponzi Scheme comes apart, and were dealing with a Very Crooked Market, where rules don't count.. Trading against computers that look to suck every last dime of wealth out of the sheeple. I believe SGS and many in this crowd, to be better than the average, by far. But I also believe that when this bullshit all blows up, all paper assets will be Worthless ! Mines, will be Nationalized by Government. Oil, Silver, Gold, you name it.. Were dealing with very Nasty, evil people out there.. They want to control the World ! So I just stick to buying the PHYZZZZ!!! I don't have enough "Play" money to Loose ! I Bet on the Sure Things !

  29. @Colin & @Ol'FordTrk
    I have had similar issues as you stated Colin. Not last night I had a neighbor who says "Gold is at its peak, as is will lose if you purchase it. You should by FORD because you are going to make bank in two years." 6 Months ago, I would have spent the remainder of the evening arguing with him about how flawed his logic is. I have given up on "spreading the word." I might as well just let the sheeple go about their business and let them wait in lines after it's too late. Now I limit my inquiry to my friends as "So, did you every take delivery on any physical?"
    Mostly the reply is no. Some folks are genuinely interested in it, but few have the money to purchase anything (Coach bags and personal trainers are expensive!). Others I think makes them nervous. Weak hands.
    My hope is that if the dollar gets replaced, the government isn't coming around asking me for my stash to help out those people

    Might I refer to this joker on BusinessInsider Joe Weisenthal's ideas about our government debt:

    His solution is that all the households of the United States could pay for it. Scary territory here, because eventually when folks like Joe & my neighbor want cans of soup, and the government is rewarding 8 cans of Campbells for each ounce of silver turned in, I know those fuckers will be after all of us...for the better of "The People" and preservation of our "shared freedoms" no doubt. We according to Obama will be forced to "eat our peas."
    Nah, I will just continue to stock phyzz. I was going to go handgun and tactical rifle shopping today, but have lost interest given the reported tail at the complex pool. Be well and stack that phyzz (don't forget guns, ammo, & soup too.)

  30. @SVP

    That is definitely an eye opener. It seems despite jokes about Americans and Canadians being one of the same, our views on how to finance our economy is completely whacked. If anything, Americans appear very childish and think money is something that you can throw away.

    None of my classmates have that type of mentality. Some of them will grab stocks from the media (I had one guy who was heavily into RIM) because of the typical thought of "well this is going definitely going to create interest, therefore it should raise the price." However, none of them did any sort of daytrading.

    I did some daytrading myself and I have been somewhat successful. Funny thing is, I could've made way more money by simply throwing my money into gold and silver physical ETFs right from the start instead of dicking around with junior mining stocks.

    Here's hoping silver and gold get even further.

  31. @bflowers - that is awesome about your kids. I hope that I am so lucky. I have a 6 year old that if given a pre-65 quarter and an older one can tell you which one is sliver by bouncing them on the granite counter top. He is also on a first name basis with the coin guy too. So far Lil'Ford's stack is off to a great start. I'm not worried about paying for college at all. Congrades on raising well informed children.

  32. Wow! Just checked my latest eBay auction. I bid spot on a roll of circulated Franklin half's, current bid is up to $360!

  33. SVP: good to the service academies are still producing men who can think. Look at your question this way: 1) you're basically buying on margin; 2) worst case scenario, silver goes to $5, how ill you handle the loss?; 3) If you can take the risk, make SURE you have a workable plan to pay off the loan without having to liquidate your PM's; 4) be prepared for significant deflation before any hyperinflation event and be aware that gold (and to a lesser extent, silver) is increasingly recognized as money (see, e.g. J.P. Morgan c. 1890: "Gold is money. Everything else is credit." Still true today) and 5) If you go forward with this, I'd consider putting a percentage into gold as well--less volatile, less downside risk--since this is a margin buy.

    Good luck.

  34. p.s. I knew you were graduating from Boat School (or one of its lesser brethren) from the clues you dropped in your email, but didn't want to "out" you as it were until you did it yourself. I still get back to see my sponsor up on the Severn every few years...a lot of good friends from those years and when you are my age you will find it's pretty easy to pick up where you left off when you meet them again (and you will, it's a small world). When I was your age, I still thought equities were the only way to go. I learned the hard way. You are well ahead of the curve.