Silver investors over the last seven years have been on a
rollercoaster ride as silver has bucked like a bronco to move between various
price extremes with a rapidity not often seen in other asset classes.
They may be forgiven for wondering if it is worth the effort and not
just move onto a less volatile investment like gold. After all, seeing silver
move rapidly from $4 to $8 and $6 to $15 and then $11 to $21 is great for
profits but if you snooze you lose big time as gains can be wiped out in
weeks if not days.
Apart from complex hedging actions is there not a way for more mild
mannered silver investors to limit their downside risk? Is there not a form
of silver investment that protects them from volatility and sleepless nights?
The answer is “Yes” or rather the answer was “Yes” a
long time ago and perhaps now is the time for this old form of silver
investment to make a comeback.
I am talking about silver indexed bonds and they haven’t been
issued since 1985. You won’t read about in any silver investment book,
newsletter or article unless it was written 25 years ago. Well, that is not
quite right as my newsletter addresses them in its latest issue. But I feel
this is something that should not be limited to a small number of readers. I
think this type of investment is ripe for a relaunch and I think a volatility
sick investor community is ready for it.
What is a silver indexed bond and how does it work? Quite simply, a
silver indexed bond is like a normal bond that is bought for an initial sum
(the principal or capital) and interest is paid on it until a maturity date.
Where it differs from a normal bond is the option which allows the bearer to
convert the bond into an agreed amount of silver or the cash equivalent if
certain conditions prevail.
Let us explain this by way of example. In fact, we will a real life
example which was the very first silver indexed bonds issued by the now
defunct Sunshine Mining and Refining Company back in April 1980.
They initially issued $25 million worth of bonds in units of $1,000
paying 8.5% and maturing in 1995. Each unit of $1,000 had the option to be
converted into the market value of 50 ounces of silver so they priced silver at
$20 an ounce at the time of issue.
Now imagine silver went to $40 an ounce after that. The bond would
nearly double in value to $2,000 and the owner could sell it into the market
like any other tradable bond.
The bond holder also had the option of redeeming the bond piecemeal at
a rate of 7% per annum or he could wait to maturation and collect the final
value plus the interest payments along the way. A $1,000 bond would collect
$850 in total interest which could be further reinvested.
But of course silver did not go to $40 after 1980; it went to $4 as a
25 year silver bear market ensued. But undeterred, the bond holder would
simply collect 8.5% per annum and await the return of the $1,000 at the end.
Well that was the theory but Sunshine Mining ran into financial trouble as
the grinding bear market took its toll and they defaulted on the bonds in
1991. Meanwhile the value of the bonds traded below par value as silver
traded lower and doubts about the company grew.
So you may say the story of Sunshine Mining is a warning not to issue
silver indexed bonds. No, the story is a warning not to get too much into
debt at the start of a 25 year silver bear market. If as a silver mining
company you think we have entered another quarter century bear then you have
a lot more to worry about than whether to finance your next project with a
bank loan, share issue or silver indexed bond.
But if you believe with me that silver is in the early stages of an
equally long silver bull market, then the time is ripe to consider this form
of silver investment and come to the rescue of volatility sick silver investors.
Sunshine Mining raised $90 million dollars through those silver
indexed bonds between 1980 and 1985. In modern money that equates to about
$200 million. Moreover, when the news came out in January 1980 that this bond
was coming, individual and corporate investors expressed an interest to the
tune of $1.7 billion or nearly $4 billion in modern money. Of course, the
difference in the silver price between January and April 1980 was about $30
and that was enough to kill off most interest.
Today is different and silver is at its major lows rather than major
generational highs. But there is a credit crunch on and mining companies are
as starved of non-crippling credit as anyone. So why not use your main asset
as the showpiece of a new bond product which guarantees a floor on how low
the investment can go (the initial outlay plus interest), pays out in silver
and allows you as a financially sensitive company to issue at a lower rate of
interest because of the silver talisman?
Sounds like a winner to me. I have emailed various silver mining
companies promoting this idea. Which silver mining company will be the first
to go for it?
Roland Watson
The Silver Analyst
silveranalyst.blogspot.com
All
articles by Roland Watson
Further analysis and comment on the silver market can be read in the
subscriber-only Silver Analyst newsletter described at http://silveranalyst.blogspot.com where readers can obtain the first issue free.
Comments and questions are also invited via email to silveranalysis@yahoo.co.uk.
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