Leverage Vs Cash
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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 homeowner 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 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. 33,600- 20,000 = 13,600. 13,600/20,000 = 68%)
Or, if Investor B decided to put in the same $100,000, he/she would then have bought 5 homes (with 20% down). Both invested the same amount of capital. Yet, investor A makes (assuming the same sales levels) $20,000 and Investor B makes $68,000.
With collateralized 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 (gold, silver, palladium, and platinum) can and have never become worthless.
The illustration is for information purposes only and not indicative of the types of profits one can expect from trading in any investment vehicle. It also does not include commissions or fees of any kind, which may or may not affect a client's actual experience. For such examples, simply contact your representative.
