Precious Metal Dividends. by https://alchemyfinancials.blogspot.com/
I’m going to start with another story that my grandfather and father originally told me, and also heard Jim Sinclair talk about 10 years ago when I worked with him doing investor relations.During prohibition, National Distillers Products Corp was no longer able to sell alcohol for public consumption, so they shifted their attention to producing chemicals and industrial alcohol.All the whiskey it had in its warehouse was forced to just sit there and age.(Horrors!)When prohibition was repealed in 1933, National Distillers had already been operating in the chemical and industrial sector and had changed their name to Quantum Chemical, so they weren’t about to jump back into the whiskey game.But here they are, with a warehouse full of now 14 yr. aged whiskey which is legal to the public again.So, they decided to pay a dividend in whiskey.For every 5 shares of the stock you had, you got a receipt to pick up a case of whiskey from their warehouse.Naturally, the stock skyrocketed because everyone wanted in on a dividend paid in whiskey.
Now there’s another aspect of this story I want to highlight.During the time of the great “whiskey dividend”, whiskey was in very short supply.It had been illegal so there was no one producing a large amount of it.One reason for the skyrocketing of the stock was so people could get their hands on good whiskey, because it was impossible to find.Not unlike gold and silver bullion is today.
For anyone who doesn’t know the technicalities of it, when you are selling a stock short you are borrowing it from someone who owns the stock, selling it today at the market price, and hoping you can buy it back cheaper later.You MUST return the same amount of shares of stock you borrowed, no matter what the price is.Ideally, the stock goes down and you can buy it back cheaper, return the shares and pocket the difference. If the company pays a dividend in that time frame between when you borrowed and sold the shares and when you returned them, you as the short seller are responsible for paying it to the person who’s shares you borrowed.This gives an added cost to shorting companies that pay good dividends, and paying a dividend in the first place is often enough of a deterrent to make a short seller pick another target in the sector he is bearish of.
In the situation with National Distillers, nobody was short that stock.The extra complication by paying a dividend that was not cash would be incentive enough to make short sellers stay away, but whiskey was impossible to find.They used something that was in very short supply to pay as a dividend that nobody else was able to get their hands on, effectively making trying to short the stock absolute suicide. If a precious metals miner were to take up a dividend policy that paid in bullion, ALL short sellers would exit their position. The stock could trade freely based on value, not games played by big guys who pound it down to make a quick buck.
As PM investors we have a few common beliefs among us.One is a generally agreed upon notion that physical supply of gold and silver is unbelievably small.Even the smallest rebalancing of portfolios by SOME wealthy individuals to include physical gold and silver would absorb ALL existing supply.In fact, a friend who exclusively invests in bullion contacted ***** in December looking for Gold Pandas.They had a “whopping” $400k of them.A moderately wealthy upper-middle class person looking to diversify their 4m in retirement savings to a 10% physical gold position would take all of it, and there’s nothing left for you.There has been much debate over the years as to the methods to invest in Gold and Silver.Some prefer bullion only, some prefer shares with more leverage to higher prices.Many want a balance of both.We all also understand that after physical supply is gone, the only thing left is the miners.
When you’re holding your bullion in your hands, there is nothing standing between you and it.No middleman.But in the course of acquiring that bullion you had a miner, a mint, a dealer, a coin store, a pawn shop, etc between you and your gold and silver.As shareholders in mining companies, we are owners of the companies pulling it directly from the earth.The only middlemen are the company’s management, who are obligated to act in the best interest of us, the shareholders.
In Part 1, I talked about mining companies being in a position now towithhold a percent of productionfor not only higher profits, but toconstrain the physical supply market and constrain those “players” that like to “play games” with PMs.A move like this would take bold management to pull off, but it is not impossible.However, the idea ofa PM dividend is much less riskyfor the average miner to do.Right now,#silversqueezeis trending worldwide.I encourage these efforts to buy up bullion so there is not enough for these “players”, but I have bad news.There is not enough for us either.However much bullion you have now, if I asked you how much do you want to have, you’re probably going to answer “more”.How will we get more physical when the dealers, pawnshops and coin stores are plumb dry?
Easy.We are the owners of the companies pulling it out of the earth.We deserve the right of first refusal on their production of gold and silver BEFORE it is sold to the rest of the market.If a miner is going to pay a dividend that costs them say, $10m a quarter, that value worth of the metal should be set aside for the dividend to shareholders that want to opt into a bullion dividend.After that, it can be sold to the market. Remember the cabbage patch kids and tickle me Elmo crazes?Flew off the shelves, no one could get their hands on them.You really think the owners of the companies manufacturing them had to disappoint their kids Christmas morning because they couldn’t get one, or do you think special exceptions were made to give some to the owners before selling to the rest of the market? Now picture that we’re talking about something actually important, likegold.
I mentioned in part 1 that a production withhold would likely be easier right now for a silver miner than for a gold miner, and I believe the same for a PM dividend.Say a gold miner pays a 2% dividend.On a $100k investment, that is $2,000 a year.Which is enough to get 1 gold coin a year from.On a silver miner with a 1% dividend yield, a $25k investment would get you $250 a year, enough for 10 silver coins.I personally would much rather earn 10 silver coins on $25k then 1 gold coin on $100k, but that is also in general why I favor silver right now and why I expect a much lower Gold to Silver ratio.
Now I know what everyone is thinking.Logistics.Are companies really supposed to mail bullion to shareholders?The costs, the time to do it, the paperwork, insurance, etc.It would be a nightmare.But there is another way.Some mining companies have a bullion store where you can buy coins and bars directly from the miner’s website.I’ve bought from both First Majestic and Great Panther before. Now picture this… As a shareholder, you choose to opt into a PM dividend.You signup with an account at the miner’s online bullion store.You include information to verify the shares you hold.Every dividend cycle, a virtual gift card is replenished with funds you can use to buy bullion with and pay for shipping and insurance on bullion that has beenwithheld from the market and earmarked specifically for shareholders first.
There would have to be some restrictions, of course.This is not 1933, 5 shares will not get you a whole case of whiskey.In Sprott’s PSLV fund, you can redeem the silver you just have to own a significant amount of the fund to do so.Perhaps not that constraining, just enough to eliminate those that only hold a few hundred shares for instance.I know I certainly would not mind paying the shipping and insurance costs out of pocket to have bullion sent to me if I was even offered the opportunity to be paid a dividend in PMs, and I imagine most would agree.Additionally, National Distillers stock went significantly higher, from about 19 to over 100 largely based on people buying it only for the dividend.How much money would you pour into a miner that offered bullion as a dividend?Additionally, if your cash right now is tapped, how many other mining stocks would you sell in favor of buying the only one that pays a PM dividend?
There is a significant opportunity here to be a leader in the PM space by paying a dividend in bullion,and it doesn't need to be as complicated as it sounds. I have never met a PM investor who's eyes didn't light up at the idea of a dividend paid in gold and silver. It is something nearly all shareholders of PM miners want. Physical metal is something we all know will be impossible to obtain for most people if there is any significant money moving into PMs and bullion that drys up supply. We are already seeing it. Bullion dealers are increasing premiums since this morning, some are out of stock. Others are refusing to sell until they see where prices open tonight. There is only one place left to acquire physical bullion from when supply runs dry and that isdirectly from the companies pulling it out of the ground.
Contact the companies you are shareholders in. Push them to withhold production for higher prices. Push them to sell bullion direct to the public and to offer a dividend in bullion. Tell them as a shareholder, you want right of first refusal for their gold and silver, BEFORE it is sold to the market!
On a final note, I just wanna sayI am blown away by the #silversqueeze movementand everyone that has been working so hard to push this thing into the public light. I've been in this industry for a bit and everyone in it knows how incredibly small it is. 1% of the market cap of Microsoft, Amazon and Apple could buy NEM outright. 10% of their combined 5 Trillion market cap could buy nearly every gold and silver miner on the NYSE. Gold and Silver have never been mainstream investments, so when I see#silversqueezetrending on twitter in NYC that isHUGE! I don't know if this is what ends up blowing the lid off or not, but it is very clear, something is brewing. For decades, Gold and silver bugs have been waiting for the day the PMs begin to fairly represent their true values as hard assets against the US dollar and other fiat currencies, and many have not lived to see that day. We are witnessing history. We are part of it. Push forward. #Silversqueeze.
(20min delay)