-- Posted 2 May, 2011 | | Discuss This Article - Comments:

Biiwii’s Approach to the Silver ‘Play’ – Insurance

Photo:  NW Territorial Mint from whom the bag was purchased & to whom it was almost sold back

Some blog comments to the Rick Ackerman/FOFOA post highlight
something I do not often write about in detail; that being physical metals. Anonymous
entities can write all they want about the metals but I, being a real and identifiable
human, write things like “see to securing debt-free value whether it be in property,
productive enterprise, quality of life and/or monetary metals.”

I have written about personal preparation initiatives like power generation, alternative
heating, firearms, a productive ‘other’ business, debt elimination and in a general way,
metals as well, with the view that actual metal considerations should be seen to before
speculating in gold stocks. As to methods of ownership (ETFs, BullionVault,
GoldMoney, overseas physical storage, domestic physical storage, etc.), most NFTRH
readers are educated well enough to know which are viable and which are not.

Preamble aside, I will grudgingly admit to owning one bag of 90% silver ‘junk’ quarters,
because this bag, bought years ago as a means to barter with the egg man here in my rural
New England town in the event of a post-hyperinflationary meltdown (or melt up, crack
up boom or whatever you wish to call it) was nearly sold last week in the urge to take
some ridiculous profit. In other words, I got a case of casino mentality. But realizing I
had paid enough taxes last year, I (for now) decided to hold the quarters for their original
intent, while implementing a plan that would work even better, as follows…

I write about balance all the time, and as part of a balanced approach, I would think that
not riding a crashing asset down might be a smart approach (given the NFTRH view that
silver is going to eventually crash from some level). Hence, sell some silver; take some
profit – you earned it man. No, don’t do it man! There is an alternative way.

Had I sold my bag of silver for Federal Reserve Notes, I would have had a really
awesome profit of around $14,000 at which point Uncle Sam would have slapped me on
the back and said “nice job kid, now fork over my cut”. So, the little speculator would be
left with some funny munny (a good chunk of which he would forfeit), the right to brag
about a genius play… and be all out of egg money. No thanks.

So I keep the bag and insure it in the form of put options on the SLV ETF. Readers have
watched me blow up options in silver in previous attempts to hedge precious metals
positions. Well, last week’s epiphany had me firming my resolve to continue doing this
going forward, albeit with a higher level of commitment and with a mindset that I am
hedging physical silver primarily.

It works like this, if the value the market has assigned my bag were to crash, I would
make enough FRN’s on the put options to help mitigate the ‘price’ damage; meanwhile, I
would still have my eggs come a post-hyper crack up. The key here is to not think of this
as a trade, a profit opportunity or anything else but insurance. Another key is the
discipline to continue throwing the expiration dates well out on the horizon perhaps with
the expectation that they will expire worthless, or be sold at a loss as new puts are
initiated still further out on the time horizon.

Of course, if my view or personal situation changes to the degree that I no longer care
what the assigned market value of silver may be, then the process of buying insurance
could be terminated at any time. But the way I currently read the silver market, I would
like to remain a bag owner while at the same time, avoid becoming a bag holder. So
please, if you see bearish silver positions popping up in the portfolios below (and you
will see a new one this week) do not read anything into it other than the writer’s
reasoning with regard to the need for insurance.

http://www.biiwii.blogspot.com
http://www.biiwii.com

Excerpted from the May 1st Edition of Notes From the Rabbit Hole, which then went on to extensively analyze the precious metals complex as a whole, from technical and fundamental perspectives.