How to Buy a Vacation Home with Silver
Updated: Sep 14, 2019
Are you feeling ready to buy a vacation house? You might want to hold off on real estate and invest that money in silver instead. Because if historical trends are any indication, we’re approaching a time where those with enough ounces of silver can skip the mortgage and go straight to the sale.
In building a portfolio, it is prudent to diversify your holdings across asset classes. You can look at the correlation of assets over time to better diversify your investments. The four major assets include stocks, bonds, real estate and precious metals. These asset classes do not move in the correlation with each other. Investors can use this to diversify their portfolio and to profit from contrasting the asset movements against each other. One opportunity is to invest in silver to offset correlation with the real estate market in the coming years. This can even be catapulted into having enough silver to purchase a vacation home!
Let me explain.
Courtesy of goldsilver.com, the following chart we can see the average US house price versus silver over the last 50 years. This chart creates a ratio of average home sales price compared to the price of silver per ounce.
Looking at the chart we see two distinct time frames when US housing peaked in value versus silver. Once was in the early nineties with the price of housing over 40,000 ounces of silver and again in the early 2000s with housing above 50,000 ounces of silver. In comparison, the lowest troughs occurred during major market downturns and recessions. The lowest housing prices were in 1980 with a house costing only 2,000 ounces of silver. Following the real estate crash in the late 2000s lead to housing prices falling to 5,500 ounces of silver.
Following the 2003 peak, silver had increased in value by close to 900% versus average US house prices. Since silver spot prices came close to $50 oz in 2011, we have seen a recovery in average US house prices (especially versus silver). This ratio has been increasing since 2012 as real estate has heated up with more dollars chasing higher yields from rental income and capital appreciation due to low interest rates.
Will we again witness a day when 2,000 oz of silver can buy the average priced US home?
The real estate market is getting too hot as the number of players continue to increase. Not only is there more large investors entering the fold but everyone uncle is flipping houses as their side hustle. It is nearly impossible to find a bargain property on the MLS listings as the competition is aggressively finding off market deals. This activity may lead to another real estate bubble in the coming years. The catalyst for the bursting may be when interest rates rise and rental demand falls.
At the same time, silver has broken out from a long-term downtrend. In June 2019, silver prices (and gold) measured by the ETF (SLV) have increased 30% or more in a few months. This is indicating more dollars are flowing into precious metals including silver. This trend will likely continue as investors are getting concern about the stock market hitting all time highs month after month. We all know the stock market can't go up forever so at some point a major pullback may come. Economist have been predicting a potential recession in 2020 or the coming years.
Here is the perfect setup.
Investors should look to the convergence of the two trends. While waiting on the real estate market to turn, investors can be stockpiling their silver investments. The price of silver will continue to rise over the coming years so investors can dollar cost average into this trend. Meanwhile, real estate housing prices will moderate or decline during a recession. At the point of intersection, an investor will have accumulated a large enough capital in silver (buying and price appreciation) to purchase that vacation home while the housing prices are in decline!
This process is a long-term play as you can accumulate and grow your silver investment over time. This has a number of advantages such as diversifying your portfolio, buying at the lower end of the price curve, time for price appreciation and others.
People who invest in silver often say that doing so lets them hedge against the risk that their other investments might depreciate – and against the risk of catastrophic events. According to these investors, silver’s intrinsic value and history of being used as a currency mean that even if the dollar’s value drops, folks who hold silver will come out on top.
How to Invest in Silver
The clearest way to invest in silver is to go out and actually buy the physical metal. Bullion silver is available in coin and bar form, and most coin dealers and precious metals dealers will offer silver bullion in various sizes and formats. Typically, you can find coins and bars as small as a single ounce, or large bullion bars as big as 1,000 ounces.
For traders, exchange-traded funds that themselves own silver offer an effective substitute to owning bullion directly. Each share of a silver ETF corresponds to a certain notional amount of silver, and the prices of ETF shares typically track silver prices fairly closely. Like any mutual fund or ETF, silver ETFs have expenses that get charged through to shareholders, but they tend to be fairly modest. The iShares Silver ETF (SLV), for example, charges an annual expense ratio of 0.5%.
Another way to invest in silver through the stock market is by buying shares of silver mining companies. Silver mining stocks usually rise in value when silver prices go up and fall when silver performs poorly. Often, for a given price increase in silver bullion, mining stocks will climb several times that amount in percentage terms. However, the challenge with silver miners is that you also have to deal with the risks involved in actually operating a mining operation.
The largest silver mining stock by market capitalization include: Pan American Silver (PAAS), to its closer rivals Hecla Mining (HL) and Coeur Mining (CDE) to the smaller players First Majestic Silver (AG) and SSR Mining. The favorite tends to be Wheaton Precious Metals (WPM) -- and only because Wheaton Precious isn't a miner but a streaming and royalty company, and can thus earn strong margins even at low silver price points.
How to Create Monthly Income from Silver
For those who do not wish to own the physical silver, they can invest in the ETF known as SLV. This security tracks the price of silver and is easily purchased through your brokerage account. While the physical asset does not produce any cash flow, you can create monthly income using SLV. This is as simple as selling a put option to collect option premium for income. Then, if SLV is put to you, a covered call can be created to create income from selling the call option.
Here is the chart for SLV for the past three years:
You can see by the CTM trend at the top of the chart when to invest & what strategy to use. Every time the indicator reaches the green circles, it is time to sell put options on SLV. This is as simple as selling a PUT option at a strike price near the current security price for 1-3 months forward. You will automatically be credited with the option premium at the time of sale. The value of the PUT option will decrease as the time value decays.
If the SLV price remains above the PUT option strike price, the option will expire worthless. as this happens, you sell more PUT options at a strike price adjusted to be near the SLV price. You can continue to repeat this process to collect income for every investment. This serves two purposes: (1) it produces monthly income while following the silver price; and (2) it can be saved to invest in the vacation home instead of owning the physical silver assets.
If the SLV price moves below the PUT option strike price, the SLV may be put to you. This means you will now own __ shares of SLV based on one option equals 100 shares of SLV. You should always have enough capital in your brokerage to cover any options sold. When the shares are put to you, a covered call will be traded. This requires selling one CALL option for every 100 shares of SLV you own. You will receive option premium for the sale of the CALL option. Again, set the CALL strike price above the market price of SLV. If the SLV moves above the strike price, your shares may be called away but you keep the premium for income.
As you can see, this process can be repeated over and over like the adage to "wash, rinse and repeat." This investment will provide continuous monthly income over time as you move from selling PUTs to covered calls based on the trend in SLV. Some investors have grown their account to the size to produce enough income to actually cover the mortgage on a vacation home.
Now, you can use this strategy to buy a vacation home with silver.