Managing Ownership of Precious Metals Bullion Product

All of the information provided herein is intended to be an informational guide to assist managing the ownership of Precious Metals Bullion Products. It is not intended to be considered as solicitations or recommendations made by PMI. Please refer to the Risk Disclosure, Customer Account Terms & Conditions, and Customer Account Documentation, as they are the Controlling documents of your Account Relationship with PMI.

Why Precious Metals?

The Ownership of Precious Metals Bullion Products should be approached as Long Term. Unlike “Blue Chips” stocks which generally yield, quarterly, semi- annual and annual dividends (regardless of the price of the stocks), Precious Metals Bullion products cost money to own, such as storage, and lost opportunity costs, related to forfeiture of interest income on funds converted from savings towards the purchase cost.

Despite these cost factors, ownership of Precious Metals Bullion Products representing 5 to 10 percent of Net worth, has been considered as part of the wise investors portfolio for many years. Much of the thinking supporting this theory is the continued ownership of Precious Metals Bullion Products as a hedge against Inflation, Dollar Devaluation, Declining Stock Prices, Rising Interest rates, War, Bankruptcy of Blue Chips Stocks – (Such as Eastern Airlines, Pan Am, and most Recently Enron, etc) and their Negative impact on “paper related” investments.

In Short-in times of uncertainty "He who has the Gold, makes the Rules"

1. Paid for Product
   A Customer of a Retail Dealer has 2 (two) Choices of Delivery
   
   
   1. Home Delivery
      This involves additional costs such as, Fabrication, Shipping, Postage and insurance, or insured courier and applicable taxes, (if any).
      *It is important to understand that product delivered home will involve costs related to the sale of said product, such as shipping, assay, and opportunity costs.
      
   2. Delivery to an account with PMI
      This involves costs such as the New Account Opening Fee ($100.00) and the Prepaid Annual Administration fee ($100.00). All Accounts are subject to a storage fee of ½ of 1% of the annual weighted average value of the product, and Credit fees of Chase Manhattan Prime, plus 4%, which are charged on all outstanding balances due to PMI. (Both of which are computed daily and added to the Account monthly). All Accounts are subject to Collateral Call (Equity Call) in the event the Equity falls to “at” or “below” 15%. Should an Account wish to take home delivery from the Account with PMI, in addition to paying PMI all balances due PMI, the Account will also have to pay Fabrication costs, Shipping and Applicable taxes, (if any).

Calculating Break Evens:

1. Each Purchase of Product stands Alone
2. B.E. = Total Cost divided by Number of Ounces
3. Total Cost = Total Purchase Plus Retail Commission Charged
4. PMI Account Opening Fees and Prepaid Annual Administration fees are not utilized to compute Break Even, as once established the Account may utilize the Account for as many purchase and sale transactions as desired.
5. Fabrication, Shipping, & Taxes (if any) would be considered as part of Total Cost and therefore would affect the Break Even.
6. Interest and Storage fees will act to increase the Initial Break Even of product purchased utilizing an Account with PMI.

   Annual Storage Fee as it relates to increase of Break Even cannot, at the initiation of a Purchase, be 100% computed. The reason for this, is that the charge is based on the constantly changing value of the product.

   For Example (Per Oz Value x .005)

   Value $ 5.00 $10.00

   Estimated Annual Storage Fee 2.5¢ per oz 5¢ per oz

Interest Charges accumulate on all outstanding Credit Balances due, which, like storage fees, constantly change, due to Interest Rate Changes (up or down), Credit Balance reductions, etc.

However, in order to have a good understanding of how Interest Charges will effect Break Even one must examine a “typical credit purchase”.

For Example:

1000 Silver at $5.00 =	$5000.00
Credit Advance 80% =	$4000.00
Total Annual Interest 8.75%=	$ 350.00 divided by 1000 oz = 35¢ per oz/per year

Calculating Collateral (Equity) Calls

All Accounts utilizing Credit facilities provided by PMI are subject to Collateral (Equity) Calls, as disclosed in the Customer Account Agreement with PMI. Collateral (Equity) Calls are triggered when Account Equity reaches 15% or Less, and it is the Responsibility of the Account holder to monitor their own Account. Once 15% or Less Equity is reached the Account must be restored back to 20% Equity. Should an Account fail to restore Equity back to 20%, the Account becomes subject to partial or total Liquidation at the sole discretion of PMI.

Upon the establishment of a new purchase of one product type, it is possible to calculate the collateral call level on that product.
(Credit Balance Due divided by .85) divided by # of ounces = Price Level of Call

Example:

($4000 divided by .85) divided by 1000 oz Silver = $4.70 = 4705.88 ($4000 divided by .85) divided by 20 oz of Gold = $235.29 = 4705.88

However, once an Account has more than one Product type, or Multiple additions of the same type, the Collateral Call Calculations must be based upon the current market value of all product, as they relate to the total Credit Balance due (with restoration back to 20% equity).

Step 1

To Compute the Market Value of an Account which would result in 15% Equity, take the Current Credit Balance Due (CB) and divide by .85.

$10,000 (CB) .85

= 11764.71 = Total market Value equal to 15% Equity on a $10,000 CB.

Step 2

To compute the minimum dollar value of the call – take the current Market value x .8 and subtract the Current Credit Balance Due.

Market Value = $11,764.71
X           .8
$ 9,411.77
Current Credit Bal	$(10,000.00)
$ Value of Call	$ 588.23

Bear in mind that ongoing Credit Fees and Storage Costs are increasing the outstanding Credit Balance Due on all Accounts, and do effect Equity Call Levels.

Options Available when in Collateral (Equity) Call

1. Purchase Like or Unlike product on a regular Down payment requirement at current price levels. (Total Down payment required is Regular on New product plus $ value of Original Call).
2. Purchases paid for product (equivalent in Value to 125% of the Call Amount) and add as additional Collateral. (Like or Unlike Product)

   Calculations
   for Paid for Product with equity of 15% or less.

   Beginning Equity	Amount of Additional Paid for Product	Remaining Equity
   15%	6.25%	20%
   14%	7.5%	20%
   13%	8.75%	20%
   12%	10 %	20%
   11%	11.25%	20%
   10%	12.5%	20%

   Note: either of option A or B accomplish Cost Averaging and support the original approach of Long Term profitability.

3. Reduce Credit Balance due by the amount of the Call.

   Taking the actions delineated in A, B, or C, should result in excess equity being created when prices recover – (See Equity Release)

4. Liquidate appropriate percentage of the product held (All proceeds to be applied
   towards Credit Balance Reduction).
   

   Partial Sell Calculations
   for Accounts with equity of 15% or less.

   Beginning Equity	% of Holdings to be sold (100% of proceeds to reduce CB Due)	Remaining Equity
   15%	25%	20%
   14%	30%	20%
   13%	35%	20%
   12%	40%	20%
   11%	45%	20%
   10%	50%	20%

   
   
   
5. Total Liquidation of product with Residual funds (if any) available to Customer.

Account Statements disclose Equity Percentage on all Accounts as well as “Excess Equity” which reflects the difference (plus or minus) relative to the required 25%. Accounts can access their Account Statements at PMI’s Website at www.pmilimited.com

Equity Releases

Account Equity in excess of 25% may be released to the Account holder, upon request. This amount is added to the then existing Credit Balance due and becomes subject to the Credit fee charge. Excess Equity can also be utilized to purchase product.

Note: Utilization of Excess Equity will effect “Collateral (Equity) Call Levels.

How to Profit from Ownership of Precious Metals Bullion Products

1. Never overextend yourself. Use only funds that you will not need for day to day living expenses.
2. Once you have determined the total funds you wish to utilize, decide if you wish to totally pay for your product, or utilize the theory of “Other Peoples Money”. (Whereby you would use only a portion of your determined funds as a down payment towards your purchase, and keep the balance in reserve for future use, but dedicated towards your Precious Metals Portfolio).
3. As with anything you have purchased, in order to profit from the sale of that item, you must sell, at a value that exceeds the total costs related to the ownership of the item.
4. If you utilize the theory of “Other Peoples Money”, you are increasing the costs, as you will be charged interest on the amount you borrow. However, this cost is reduced by the interest you are earning on your reserve funds as discussed in paragraph B.

The following are theoretical examples of how to approach profitability while maintaining ownership at all times (using Silver with a Purchase Price of $5.00, a determined amount of funds to be $20,000, and a Sale Price of $10.00).

1)	Cash Paid for product Purchase $20,000 divided by $5 = 4000 oz of Silver Sale $10 x 4000 oz = $40,000 Return on Cost = 20,000 = 100% PROFIT
2)	Financed Purchase 4000 oz of Silver @ $5 = 20% Required Down payment Amount Financed One year Interest @ 8.75% Balance due after one year Sale @ $10.00 x 4,000 = Deduct Balance Due Net Proceeds Deduct 20% Down payment Net Profit Return on Down payment	$20,000 ($ 4,000) $16,000     1,400 $17,400 $40,000 ($17,400) $22,600 (To be returned) ( 4,000) $18,600 $18,600 divided by $4,000 = 465% PROFIT

Examining the above examples reveals an important point – once the Silver has been sold – it no longer exists in your portfolio!!

This violates the theory of 5 to 10% of net worth being held at all times. As a general rule of thumb the following sales could be used to accomplish constant Ownership, while yielding the equivalent profit.

1)	Original Cash Paid for Product 4,000 oz at $5 = $20,000 Sale 2000 oz at $10 = $20,000 = Return of Original Cost Balance of Ownership 2000 oz, totally paid for with a value of $20,000
2)	Original Financed Purchase 4000 oz Silver @ $5.00 = Bal Due after 1 year = Add 20% Down payment = Divide by Sale Price Total Product sold	$20,000 $17,400 $ 4,000 (To be Returned from Sale Proceeds) $21,400 $      10 2140 oz
	Balance of Ownership 1860 oz totally paid for with a value of $18,600 Funds utilized $4,000

Approaches 1 & 2 have accomplished constant ownership, and returned the Original Funds utilized. In either case the Remaining Product has been paid for by the increase in value and the original funds utilized have been returned. Additionally the Remaining Product can be utilized as collateral to purchase up to 4 times the market value, in like or unlike product utilizing the credit facilities. (While adhering to the theory of paragraphs A & B hereinabove).

Use of Equity Releases to Capture and Return Excess Equity.

Equity Releases may also be used to capture and return to the Account holder, portions of original funds invested, up to the total of an Account holders’ original funds, plus funds which would normally be recognized as profits, which would be created by increased product values over and above, the costs of product held in the Account.

This can be accomplished without ever selling product at the time such equity releases are taken.

Utilization of Equity Releases for this purpose should be properly managed, in the event of a down turn in Market value after such equity releases have taken place. The easiest way to accomplish this is with the use of “GTC Stop Sell” orders on sufficient volume of product to re-align the account to 20% equity, should the Account equity drop to 15%.

The following is an example of the use of equity releases for the purposes described in this section. (For Illustration purposes these examples do not reflect interest and storage costs).

Original Purchase

10,000 Silver @ $5.00 = Downpayment to PMI Credit Balance Due PMI Price Moves to $10.00 10,000 Silver @ $10.00 = 80% of $100,000 Existing CB due PMI Excess Equity	$50,000 ($10,000) (Original Investment) $40,000 $100,000 (Mkt Value) 80,000 (Amount PMI will Finance) ($40,000) $40,000 (Available for Equity Release)
3. Account Holder takes Equity Release of $40,000 this is added to Account      Holders Credit Balance Due PMI.

Net Result

(Prepared by PMI February, 2002)