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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

The Silver Indexed Investment Bond

Commodities / Gold & Silver 2009 Jul 02, 2009 - 01:11 AM GMT

By: Roland_Watson


Best Financial Markets Analysis ArticleSilver 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?

By Roland Watson

Further analysis of the SLI indicator and more can be obtained by going to our silver blog at where readers can obtain the first issue of The Silver Analyst free and learn about subscription details. Comments and questions are also invited via email to .

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