Honest Silver and Gold

With the SampleAgreement being done, I thought I would just summarize everything so you don’t have to wade through 151 pages of legalese.

Here’s how it works.

First, I am keeping the fund small. This means fewer than 35 unaccredited investors and less than $5 million in total assets. Keeping the fund small means there are no regulatory or reporting requirements. I have neither the desire nor the patience to deal with that kind of nonsense.

Second, I’m the guy. I make the buying and selling decisions for the fund. I also have an interest in the general partner, Honest Silver and Gold Buyers, LLC.

Third, the mechanics on your part are very simple. Get two copies of the documentation package. It’s about 150 pages saying exactly what I just said in the two paragraphs above. Read it, have your lawyer read it or whomever else you want. Then send me one signed copy of the agreement and a check or wire for at least $10k. When I receive both the agreement and the funds, you’re in. From here on out, you sit back and collect quarterly checks (I might do monthly if you want).

Fourth, I go out, following the 5 steps, buying silver (and gold) under market, hedging the position against market fluctuations, and selling at market. We make somewhere around 8% per month (not guaranteed, past returns are no indicator of future performance, etc etc legal disclaimer) and profits are split 50/50. There are no management fees or asset fees or any other kind of fee. I make money only if you make money.

Fifth, I will be updating this blog with transactions as we go along so everyone will be up to date as to what is going on.

So to talk to me about getting your copy of the placement documents, email me at neal@honestsilver.com

The placement docs are done, at least in the first draft. This has been the major hurdle between potential investors and high steady returns from precious metals trading.

More to come soon….

After buying the silver or gold at less than the market value, the big question is, “What if the price goes down before we sell?”

Welcome to the wonderful world of hedging. The term “hedge fund” gets thrown around a lot, but it’s really very simple. A hedge is a position you take to offset risk in another position. A hedge fund is a fund that, theoretically, uses hedges to minimize risk.

Here at Honest Silver and Gold our risk is very well defined. the difference between sales price and purchase price is our profit. Therefore, as the market price of silver or gold declines, so does our profit. In extreme circumstances, this could become negative and translate to a loss! This is something to be avoided.

The question now becomes, “How do we protect from drops in market price?” Fortunately, this has a simple answer: puts. A put is a contract that allows the purchaser of the contract to sell the underlying asset at an agreed-upon price until some expiration date. I realize that can be confusing, so let’s look at an example.

John wants to insure his 100 ounces of silver against loss of market value because silver has hit a high of $45. He buys a put on the open market that has a strike price of $47 and an expiration date 6 months from now. The cost of this put is $5.

John does this because he doesn’t want to lose his profits, so he’s willing to buy this insurance, aka “hedge.”

Let’s see what happens when silver moves in price. If silver drops to $35, his right to sell at $47 is now worth a lot more money. If someone offered you the chance to sell $12 above market value, wouldn’t you take it? Of course you would. So that put that John bought is now worth $12 (or more depending on how much time has passed). His silver dropped by $10, but his put went up by $7. The $3 loss is what John paid for the duration of the insurance. Overall, he reduced his loss to a maximum of $3.

On the other hand, if silver goes up to $55 instead, the picture changes. John’s put will be worth much less, but his silver will have gained $10. Let’s say John holds the put until it expires worthless, he has gained $10 in silver value and lost $5 on his put, for a net gain of $5. In this scenario the put reduced potential profits – that’s the price of insurance.

Now that you understand how a put functions, it’s important to understand how this applies to Honest Silver and Gold, LP. We use puts to protect our purchases until we can sell them. If we buy silver at $35 when the market value is $43 and spend $6 on a put, our worst case scenario is a $2 profit (43 – 35 – 6). Ideally, the silver will be sold as quickly as possible. After the silver is sold, the put can be sold back into the market (Step 4) for close to what we paid for it. This will mean we get the insurance for close to free, maximizing the profit at around $8.

This post will explain the fundamental process of how Honest Silver and Gold, LP turns silver and gold into cash flow. Honest Silver and Gold is about, well… honesty. So there are no tricks or diversions here. Just these basic steps:

Step 1: Buy silver and/or gold at under the current market value.

Step 2: Buy long-dated (4+ months to expiration) puts

Step 3: Sell the silver/gold at close to market value

Step 4: Sell the puts back into the market

Step 5: Profit

That’s all there is to it! Of course, the devil is in the details, so each one of these steps will be discussed individually as to how it is achieved.

There was a report out today about the price of food in China. It was pretty shocking. Over the past ten days, prices n a number of foods throughout china have gone up by double digit percentages.

The oval average increase was 4.6% over the past 10 days. In case that sounds small, let me emphasize that this is a HUGE increase over such a small period of time. Now it is true that this was just an isolated sample, and the rate of price increase will probably revert to its mean, but that’s not what matters for gold and silver.

What does matter for gold and silver prices is that when price shocks like this start occurring, people lose confidence in the government run money. They turn to gold and silver as commodity money that holds its value instead.

What happens when the largest precious metals consumers get spooked and want to hold on to their wealth? They buy gold and silver. Silver especially since it is so much cheaper than gold.

Chalk up another point for the bull case for commodities, especially gold and silver.

As to why Chinese inflation is going so fast, it has to do with the trade relationship the Chinese government establishes with the exporters in China. The Chinese government prints enough money to keep the yuan weak versus the dollar. That way Chinese goods remain cheap for Americans (and everyone else too) to buy. Great for the chinese exporter, lousy for the other Chinese people. This is now backfiring because the US (and everyone else too) are printing more and more money, so the Chinese government is following suit.

–from the iPad

I spent a bit of time yesterday morning attending the monthly Atlanta coin show in Marietta. Here a few observations:

First, the coin collecting crowd is an older crowd. I would estimate that the average age of the people there was north of 55.

Second, the VAST majority of coins on offer were nice specimens of what we call “junk” silver. These include most of the American change minted before 1965. There were lots of quarters, dimes, halves, and silver dollars. I was surprised that even numismatic American bullion coins like the eagle were underrepresented.

Third, and this is really the converse of the first, world coins were few and far between. I counted exactly 4 Chinese panda coins, and the prices were all ore than you could get them for on eBay. I hear this is different at the west coast coin shows. Perhaps there is more importation going on through those western ports.

Fourth, most importantly for Honest Silver, many of the dealers were buying junk silver. This may be a good market to sell into.

Overall, i have to say I wasn’t terribly impressed.

–from the iPad