TPA does not offer investment, tax, financial or legal advice to clients. Individuals who believe they need advice should consult with the appropriate professional licensed in that area.
What Program to Use?
One of the most exciting and proficient investment programs available is the Collateralized Financing Option. Investors have the option of either completely paying for their purchase, or – as most do with their homes – take advantage of financing to increase their holdings and profit potential. One significant difference between home financing and collateralized financing on physical commodities is that with a CF program, it’s the commodity that provides the security, not the creditworthiness of the individual.
The purchase and sale transactions are the same with CF as with cash. The home owner example is the best to illustrate how the program works.
Investor A purchases a home for $100,000 and pays all cash for it. Investor B purchases an exact duplicate home, right next door to investor A, but only puts in $20,000 of his own money and has the bank finance the remaining $80,000. Investor B pays 8% in interest. After one year, both sell their homes for $120,000.
Investor A makes $20,000, or 20%. Investor B makes $33,600 or 68% and, had five times LESS money in play doing it. (Investor B $120,000 sale less the loan of $80,000 = $40,000. 8% interest was $6,400. 40,000 – 6,400 = 33,600.)
With collateralized financing (see FAQ section) there are always minimum equity levels. As long as the position is maintained, risk is diminished to short term market fluctuations. Unlike most every other asset class, physical commodities and especially precious metals can, but have never become worthless.
WHAT IS COLLATERALIZED FINANCING?
Collateralized Financing (CF) has also been called leverage. It is a means by which investors can use the asset they are investing in as collateral to limit the capital exposure they are willing to take, while at the same time maximizing their profit potential. Most individuals are familiar with the concept through home ownership. Banks, using the house and land as collateral, finance the bulk of the purchase. CF on the four investable precious metals (gold, silver, platinum and palladium) usually ranges from a 20% to 35% down payment. Minimum equity maintenance is typically 10%.
HOW IS COLLATERALIZED FINANCING HANDLED?
CF is used in the purchase of precious metals in the form of bullion. Bullion is .9999 pure metal and is known by its purity hallmark (stamp). Finance companies, usually through, in conjunction with or by clearing firms lend the difference between the investor’s net money (investment after all fees) and the amount of metal desired.
For example: If an investor desires $100,000 in metal, but does not have, or does not wish to invest $100,000 at the time of investment, would have the investment firm calculate how much they would need to put in, in order to attain that level. For example sake, let us assume the amount is $35,000 with a commission of 15% on the total metal value. Most, if not all precious metal dealers charge their commissions (as is done on real estate, stocks, bonds, mutual funds etc) on the total amount of metal purchased. This example would then involve 80% financing.
If the price of the metal moves up by 30%, or to $130,000 the investor gains approximately 43%.
$130,000 - $80,000 (amount financed) = $50,000. $50,000 - $35,000 = $15,000. 15/35 = 43.
Note* With Spyker, no commissions or administration fees are charged by Spyker on sales for a period of 5 years on the initial investment made. The initial principle invested is subject only to a one-time administration fee.
If the price of the metal moves up 50%, or to $150,000 the investor gains approximately 100%.
$150,000 - $80,000 = $70,000. $70,000 - $35,000 = $35,000 35/35/ = 1
As the price or value of the metal rises, the return to the investor, using CF is multiplied.
Finance charges are subtracted from the amount lent. Six months, at current rates would be approximately 3.875% of the amount financed.
If the price of the metal moves down, an equity call would be made, requiring the investor to bring the equity up to a minimal level. That amount is not lost, but is used to increase the equity/decrease the CF. In many cases and strategies, with dips the investor is adding to his/her holdings anyhow, negating any equity calls.
WHEN AND WHY SHOULD COLLATERALIZED FINANCING BE USED?
- When an investor wishes to minimize his/her initial capital outlay due to limited current liquidity or as part of a long term investment strategy.
- When an investor seeks to maximize his/her intermediate to long term gains.
- When an investor, initiating a buying program wants a specific amount, but looks to put capital in over time.
- On dips in the price of the metal, to increase a dollar cost average program’s effect.
- In the early stages of a bull run.
WHEN NOT TO USE, OR TO LIMIT THE USE OF COLLATERALIZED FINANCING
- If the investor has limited means and or is unsuitable for bullion precious metal investing.
- If the investor is using his/her last investment dollar and could not meet an equity call.
- In the latter stages of a bull run.
- Immediately after an anomalous spike in the underlying metal (If the metal has moved over 25-40% within 10 trading days.)
- If an investor seeks immediate delivery of the metal.
USING COLLATERALIZED FINANCING IN AN IRA
It is our understanding that CF is allowed in an IRA as the collateral is used to determine the financing, not the investor’s credit-worthiness. However, as it is impossible for an equity call to be met (except with the sale of a portion of the holdings); prudency must rule any and all decisions. Gold is most suitable for IRA investing as it is the least volatile of the precious metals, yet has significant long term upside potential and is a great hedge against currency devaluation and economic uncertainty. Silver can be a good addition for diversification and additional upside but recently has been quite volatile. With proper equity levels being set, Silver is also fine for IRA positions. Note* Higher than average equity positions should be taken in IRA investments. This is where a solid client-advisor relationship is important.
Investor’s using CF should always be in a position to add minimum equity if required. For example: If an investor putting $10,000 into metal cannot place additional equity in the program at any given time, they should not use CF, or, should limit its use. (Instead of the maximum 80%, use 75 to 65% or less to diminish or negate the likelihood of an equity call) As long as a position is maintained, the likelihood of loss is low as neither Gold, nor Silver has ever been worthless, nor does anyone expect either ever will be so.
Used properly, CF is an exceptional tool for investors. Explained properly, it is easily understood and is one reason why an investor should seek, and utilize the services of a professional precious metals broker in the first place.