Protect Your Silver Profits Now
by Marc Lichtenfeld, Senior Analyst, Investment U
Wednesday, April 27, 2011: Issue #1500
I’m not going to pretend I’m smart enough to call the top in silver. As John Maynard Keynes once said, “Markets can remain irrational longer than you can remain solvent.”
I have no idea if silver will top out at $50, $100, or more.
But I do know one thing. I’ve seen this movie (twice) before, and I know how it ends. Which is why I recommend that you take a breath and think about how and why you should protect any profits gained from silver’s recent meteoric rise.
Investors have short-term memories and always say, “This time it’s different.” But it’s not. Sure, our problems, challenges and successes are not the same as the past, but human nature does not change…
The Same Arguments During the Real Estate and Internet Bubbles…
I sat front and center for two bubbles in the past decade and heard the same argument both times.
While living in San Francisco during the dot-com bubble, 32-year-old paper millionaires would routinely tell me that they planned to retire in two years. Everyone was trading stocks because “it was the only way to make money.” Books were written claiming the Dow Jones Industrial Average would go to 36,000.
The internet was a whole new “paradigm shift.” Life would never be the same.
The internet did in fact change the way we work and live. But after a little while, the markets became sane and stocks were valued appropriately. As a result, investors in many dot-com stocks got crushed and the 32-year-old paper millionaires are now 42-year-old thousandaires who still work for a living.
Fast-forward five years. It’s 2006, and I now live in Florida, one of the top markets for real estate speculation. At a dinner party, a pharmaceuticals salesman tells me real estate “is the only way to make money.”
On the way home, my wife chews me out for not being like the pharma rep and missing the opportunity to buy property in St. Lucie County, where land is cheap and investors are flipping houses and home sites.
Five years later the housing market still hasn’t recovered from the crash. Certain neighborhoods (especially in St. Lucie County) still look like a Category 3 hurricane blew through it with half-finished or abandoned houses that have been ransacked.
The Recent Rise in Precious Metals
So when it comes to the recent rise in precious metals, let me be absolutely clear: This time it’s not different…
Yes, I know we have a debt problem in this country. Yes, silver has industrial uses. And as a result, perhaps silver will never return to the lows of even just a few years ago.
But when…
- CNBC is broadcasting from coin dealer shows,
- The U.S. Mint has sold out of Silver Eagle Coins,
- And blogs are calling for silver prices of $750, $2,000, or even $4,000
…we’re getting close to a mania (if we’re not in it already).
Keep in mind, I’m not bearish on the metal. In fact, I believe precious metals belong in most people’s portfolios. I agree with The Oxford Club’s asset allocation model, that five percent of the portfolio should be invested in precious metals. I’ve even done that myself.
I’m not a mining expert. But what I do know about is investor behavior and its history of repeating itself over and over again.
Above is a chart of the Nasdaq during the bubble days compared with silver today. You can see that the pattern is similar. We know what happened next on the Nasdaq chart. Will silver follow?
Protect Your Silver Profits with Puts and Trailing Stops
If you’re an investor in silver, you need to start protecting your profits. I’m not going to tell you to sell your silver. Silver bugs won’t do it anyway. But I’m hoping that there are enough rational people out there to, at the very least, buy some insurance on it – just in case it corrects or it turns out that it really isn’t different this time.
Whether you own stocks like Silver Wheaton (NYSE: SLW), coins, or the iShares Silver Trust (NYSE: SLV) ETF, consider buying some puts. If you can’t buy puts on the miners, you can do so on the ETF.
A put is an option (but not a requirement) to sell a stock at a certain price. For example:
- If you bought the October 40 put on the iShares Silver Trust, you can sell the ETF for $40 at any time between now and the third Friday in October, no matter what the ETF price is.
- If SLV doesn’t go below $40, your put would expire in October worthless.
- If SLV is below $40, no matter whether it’s trading at $39.95 or $20, you can sell the ETF for $40.
No worries if you don’t actually own the ETF. You can still use the puts to protect the value of your coins or other silver investments because the value of the puts will go higher as SLV decreases in price.
Keep in mind that one option contract controls 100 shares, so if you see a quoted price for the put of $2.90, it will actually cost you $290.
If you don’t like trading options, then at least place a trailing stop on any of your silver stocks. And stick to them. Don’t cancel them as the price falls, because you decide you want to hang on to the stock and just know that it’ll rebound.
Trust yourself that you placed the stop for a good reason. A stop is designed to remove the emotion from the selling decision.
A New “Golden Age” for Silver?
Perhaps we’ve entered a new “golden age” for silver. Maybe the metal does go to $100 or higher. But if you’ve made some money on the run-up, it makes sense to protect your hard-fought gains.
After all, I’m sure many of you bought life insurance when you were young and at the peak of health. This is no different.
Where are we in this cycle? I’d argue we’re right around the Thrill area. Maybe a little past it. As we approach the euphoria stage it’s time to start playing a little bit of defense.
Good investing,
Marc Lichtenfeld
Any investment contains risk. Please see our disclaimer.
20 Responses to “Protect Your Silver Profits Now”
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Marc is a senior analyst at Investment U. His investment career started out at the trading desk of Carlin Equities in San Francisco, CA, where he executed dozens of trades each day for his clients.
Marc- Thank you for a very well written, non emotional analysis of the Silver Market. While I am a little more bullish than you are, nevertheless it is time to “put” in some protection to protect my gains.
Broadly speaking where would you say are undervalued assets these days?
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Good article Marc.
I agree with you. But, I hedge with options on futures rather than options on stocks. That way my physical ‘horde’ of metals is also protected.
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I think we are currently flanked by Euphoria and Anxiety.Recent purchasers of physical will not want to offload so soon but they will not feel confident holding either.
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Marc,
If you are going to do a comparison, do it with gold or platinum or copper, please don’t use NASDAQ, it’s a different animal. You can also compare the 1929 DOW versus 1980 gold and see similarities. As long as the government keeps printing money, you may see a correction, but you have not seen a top yet. The dollar is dropping weekly, what should Americans buy? Swiss Francs or Silver? Makes sense to buy both.
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Marc,
This was an excellent article written about a most essential investment lesson. Its so nice and refreshing to be able to pick up advice like this that helps us to hold on to what we worked so hard to build instead of seeing it wasting away in a bear market. Thank you so much.
James Nelson
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How to use metals as new currency,when dollars falls
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Just wanted to say thank you for your very well-reasoned reminder that everything that goes up, ultimately comes down. The very steep climb depicted in your chart compels me to recall that the stocks, commodities and other investments are no different than the latest fighter aircraft. No matter how much thrust they have, a vertical climb always ends in a stall and and a plummet from the sky.
Eighteen months ago, i bought and sold “junk” silver coins for $11 – $12 for each dollar of coin silver. Today, those same coins sell for at least $30 per $1 of coin silver, and you can’t buy a silver dollar for less than $33.
I shall try to find an appropriate silver put to cover the eventual downturn as soon as possible. I only have two question. Should the put(s) be purchased for ETFs, mining stocks or other entities and for what approximate time frame?
Thanks again for a valuable suggestion.
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i will hold silver no matter what,,thanks good advice,,appreciate:)
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Not all stock is with option. SLW has no.
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Good advice, BUT you fail to acknowledge that the price of silver has been manipulated and artifically depressed for decades. Also weighing in is the factor of the enormous short position of JPMorgan-Chase. The cat is out of the bag and they are between a rock and a hard place. There are only two possibile recourses – deliver on silver they DON’T have or pay the current prices to cover their shorts. Either one will drive the price higher. PLEASE don’t give your readers advise when you don’t have all the facts.
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THANK YOU, finally someone not just rewording what every other “expert” has been repeating day in and day out, JPMorgan-Chase is in a hold your breath and cross your fingers with their investors,now if the JPMorgan-Chase investor wants to maximize profit DEMAND PHYSICAL DELIVERY NOW!!!! Reinvest your profits and watch the finger pointing and excuses to begin.
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Marc,
I believe you when you say precious metals are no different from prior runs up…BUT I believe you are way off in your timing. I think we are only about 1/2 way through the up cycle,ie way too early to sell and get out!
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Given todays FED announcement and silver’s response….I have only one thing to say…
How is your foot???
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I think his foot is probably fine today, wouldn’t you agree?
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Can we still buy vanguard precious metals. It says
HOLD.
Thanks
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In the dot.com bubble, there was no shortage of software.
In the housing bubble there was no shortage of housing.
Neither is paralleled by the present sustained rise in the real value of silver.
Short it at your peril.
Long term, we are at the Optimism stage.
And remember that nobody really NEEDED those tulips, either.
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I sadly watch many rare hand made silver items sold and melted down years ago, craftmanship we wont see again, all lost forever!
People go wild!
I bought hugh amounts of gold at $800.00 a oz It went down to $600.00 and I was stuck it went on for yrs, SO It happens to gold too. Emergency’s come up you have to get what you can. It took years for Gold to climb back up.It was a $200.00 a ounce loss at the time for some of the investment. Now you cant buy it for less than $1,500.00 a oz. Guess what I’m say is*** They both gold and silver go up and down you just have to have enough cash so you dont need the money you invested in the gold and silver(ever) OR be young enough to be able to wait for it to go back up, if it hits bottom.But looking back I’d rather lose $15.00 a ounce on Silver THAN $200.00 a ounce on Gold!There has to be something a person can buy and hold that will be worth something $$ dollar wise, And that the average person at Wal-Mart or United or 7-11 can afford to buy
( with whats left over from their wages after gas,inflation and rent eats thru most of it)!That will keep it’s value***A saving accounts after inflation they said are now worth a -2% NOW .So is there a answer?
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Appreciate your article, Marc. I know your vision is right on target
With one holding ‘junk’ silver coin and/or one ounce coins, I’m not sure I understand the best way to protect from downside risk, since I would like to continue holding it. What puts specifically can work in this scenario?
Happy to be a subscriber.
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Well written analysis of silver markets. Yes, investors need to be cautious and not let emotions of quick profit cloud their judgement. I’d never would have expected silver to be this close to $50. That’s why I’m personally switching back to buying some gold too. If you look at the charts, it stayed flat in ’08. Silver on the other hand is much more volatile when there’s a crash.
One point I’d like to offer a little constructive criticism. Your article seems to be written for big investors. However, anyone can benefit and should have a few 90% junk silver quarters of 1-oz rounds lying around just in case they need them to survive. (Just in case the worst is true if you know what I mean).
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Silver and also gold are the only “real money” paper is going to be only worth paper. This is not the old rise and fall of precious metals as in the past as the governments of all the free countries are going bankrupt and especially the good old greenback. No fiscal discipline, no leadership, blowing trillions on two wars and the housing market, which is over half the economy, in shambles with no recovery in sight. Our life style as we have had in the past is going to be a lost shangrilla never more to visit.. So gold and silver will come back into vogue as the only “real money”….in my opinion!
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