"Everything you need to know about gold"
SILVER NOT UNDERPRICED
Silver bulls have for decades made the argument that the white metal is underpriced relative to gold. Their enthusiasm is fueled by expectations for a return to the original fixed ratio of 16:1 in favor of gold.
Using the current gold price of $1925 oz., a return to the ratio of 16:1 would require a silver price of $120 oz. – right now.
SILVER COIN PREMIUMS ARE SMALLER
One year ago I published the article Silver Coin Premiums – Another Collapse?. In it, I expressed concern about the high premiums being paid by stackers and others for the privilege of owning silver in coin form, particularly Silver Eagles…
GOLD LEAVES SILVER BEHIND
Complicated and convoluted technical analysis, inflamed fundamentals, never-ending last chance warnings and all the supposed evidence to the contrary – there is nothing that justifies the ultra-bullishness of silver stackers and investors. We might say “gold leaves silver behind, waiting, and in the dust.
SILVER IS A BARGAIN
Silver fever is rising. Calls for $100 silver (see $100 Silver Has Come And Gone) and higher echo loudly. With its price close to $25 oz. after being as low as $18 oz. last fall, now would be a good time to review how well silver has responded to past predictions of impending higher prices.
SILVER SEDIMENT
“Sediment is solid material that is moved and deposited in a new location. Sediment can consist of rocks and minerals…” and “matter that settles to the bottom…”
The silver price closed on Friday at $22.30 oz., down $1.15 from its closing price the day before.
What is worse, though, is that it follows a drop of $.50 oz. on Thursday. And, on both Thursday and Friday, the silver price collapsed early in the day, found the bottom level and stayed there.
There is a two-fold risk for investing/owning Silver Eagle coins. Below is an update and further information about the coin premiums…
SILVER INVESTORS – MONEY TO BURN?
Over the past two years, there have been some wild and crazy things happen with regard to premiums charged and paid for various physical silver investment products. For the privilege of owning silver in certain specific forms, investors are paying through the nose; and, apparently, willingly so. WHY? Is the cash burning holes in their pockets?
I just completed a review of current market premiums for both silver and gold products. It shouldn’t be a surprise as to what particular product heads the list for the most expensive premiums. Investors are having a torrid love affair with U.S. Silver Eagles.
WHY SILVER EAGLES?
The current ask price for a 1 oz. Silver Eagle coin includes a premium of 67 percent. Even on the bid side, the premium is 57 percent. The bid-ask spread of 10 percent (57 -67 percent) is the widest of any common silver product (bullion coins, junk coins, ingots, bars, etc).
The amount of premium declines considerably as one looks at alternatives. For example, the premium for junk U.S. silver coins (1964 and earlier) is only 43 percent. Definitely not a bargain, but you can get sixteen percent more silver for your money.
The reasons for owning either Silver Eagles or junk silver coins for most investors is pretty much the same. They want to protect against the possibility of a currency crisis or breakdown the financial system that results in a need or desire to trade in ‘real’ money. Things like legal tender and face value are also applicable, in addition to owning something tangible and recognizable that will be accepted willingly and freely. Those are good reasons, so why not go with the cheaper alternative?
WHY IS THE SILVER COIN PREMIUM SO HIGH?
Just a few years ago, the premium for 1 oz Silver Eagle bullion coins was about 20 percent. That still sounds high, but it is not unreasonable if you look at it on a “per coin” basis. With silver at $14 oz. a $3 per coin premium amounts to twenty-one percent. The $3 was seen as the cost to mint the coins. A similar twenty-percent premium today would be equal to $4.30 per coin/oz.
Today, however, the coin premium stands at almost seventy percent or $15 per coin. That cannot be attributable to minting costs alone. Why, then is the premium so much higher and who benefits from it?
WHO BENEFITS FROM HIGH PREMIUMS?
Some will argue that there is a shortage of silver and the demand to own physical silver leads to higher premiums for bullion silver coins and junk silver coins. If that were the case, how come the premium for 1000 oz. bullion bars of physical silver is only 1.6 percent?
Temporary disruptions in the supply chain may affect the premium to a limited extent, as well as excessive short term increases in demand. However, they are not likely to produce the longer-lasting sizeable jumps that have occurred and continue to extract their toll on retail investors. Something like that can happen when the product is withheld or output is restricted for other reasons.
The meltdown value of a 1000 oz. bar of silver bullion is approximately equal to the spot price discounted by one percent or slightly more. This means that the U.S Mint stands to gain the largest portion of the premium charged when it releases newly-minted coins. Distributors who deal directly with the U.S. mint might also share in the spoils.
A LOW-COST ALTERNATIVE TO SILVER EAGLES
For those who might want a less costly way to stack some silver, consider silver-clad (40%) Kennedy half-dollars. They come in $1000 face-value bags, similar to the 90% U.S. silver coin bags that we referred to earlier in this article.
Let’s say that you were planning to buy a $1000 bag of the 90% junk silver coins (pre-1965). The bag contains 715 oz. of silver and the current ask price is $22,055.
Rather than that, you could buy three $1000 bags of the 40% silver Kennedy half-dollars (1965-70). Each bag contains 295 oz. of silver and costs $7150.
The total for the three 40% bags is $21,450 – more than six hundred dollars ($22,055 – $21,450 = $605) less than the the one 90% bag. The kicker is that you get 24% more silver (885 ounces vs. 715 ounces) spread over $3000 face value of legal tender.
CONCLUSION
High silver bullion coin premiums are excessive and unwarranted. Small retail investors bear the risk and it is a big one. As it stands now, an excessive premium accounts for nearly forty percent of the value of a 1 oz. Silver Eagle coin.
History shows that premiums of this kind usually don’t hold up. (see Silver Coin Premiums – Another Collapse)
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!
SILVER IS DEAD IN THE WATER…
…and cheap; it’s a bargain! Buy it now before it goes to – $500? Seriously? One thing for sure; silver is cheaper now than it was the last time we heard such exuberant (irrational?) calls for action.
In fact, the lower the silver price goes, the more fervent are the claims and projections for ever higher and seemingly ridiculous prices. After more than forty years of calls for $100 silver (see $100 Silver – Nothing Has Changed) now we are being treated to fantasy projections of $500 oz.
SILVER COIN PREMIUMS
In 1972, a bag ($1000 face value) of “junk” US silver coins sold for approximately $1300-1350. The average closing price of silver that year was $1.68 oz; hence, the silver content (715 ounces) value was $1200 per bag. The remaining difference was a premium of about ten percent.
A lower silver price would generally result in higher percentage premiums because the face value of $1000 represented a ‘floor’ which limited the risk of holding the coins. In other words, the real investment risk was limited to the amount you paid over the $1000 face value.
For example, if the price of silver were to fall to $1.00 oz., the silver content value of the bag would be $715 ($1.00 oz. x 715 ounces) Since the coins were legal tender and still accepted at their face value, though, the full bag of coins retained its face value of $1000.
WILD FLUCTUATIONS IN COIN PREMIUMS
The premiums on junk silver coins has fluctuated wildly over the years. During the 1970s, as concern about inflation and its effects took their toll, the premiums on these coins rose considerably.
Then, something changed. The price of silver rose dramatically and the premiums declined. When silver prices peaked at $49 oz. in January 1980, a $1000 face value bag of US silver coins had a silver content value of $35,000.
The bags of coins, however, were selling at a discount of as much as 10-20 percent. Some of the discount was due to the fact that there was a glut of silver coins put on the market. People were selling anything with silver in it, including coins that had been stashed away for years.
In retrospect, we can see that there was little justification for high premiums on the coins since the face value floor of $1000 didn’t provide any protection with bags selling at $30,000 or more.
The silver price collapse shortly thereafter was so severe and long lasting that interest in the coins faded. The coins were commonly available for their silver content with little or no premium.
MORE COIN PREMIUIM VOLATILITY
A couple of decades later, concern about Y2K juiced the market for junk silver coins. Even with the price of silver unchanged in 1999, the premiums on the coins jumped to 50%.
By January 3, 2000, investors were convinced that the risk from Y2K was unwarranted and began selling. They sold junk silver coins throughout the year and into 2001, forcing prices lower until the coins sold at a discount again. By that time, it was cheaper to buy bags of US silver coins than it was to buy 100 oz. bars of silver bullion.
CURRENT SIVER COIN PREMIUMS
Today, retail investors are paying premiums of 40% on junk US silver coins. They have paid higher premiums recently, too, and they seem to be willing to pay pretty much any premium asked in order to own the coins.
The saving grace of buying pre-1965 US silver coins at 40-50% premiums right now is that they seem like a bargain compared to buying freshly-minted US Silver Eagles at a 70% premium. (Shouldn’t it be the other way around?)
ANOTHER COLLAPSE IN SILVER COIN PREMIUMS?
As we noted above, there were huge declines in US silver coin premiums in 1980 and, twenty years later, in 2000.
It has been just over twenty years again since the last collapse in silver coin premiums. Will we see another collapse in premiums?
Some will argue that demand for junk US silver coins will always be strong enough to maintain a high premium over bullion bars. Maybe; but that is not necessarily so.
The premium for junk US silver coins rose and collapsed during a period when silver prices were rising dramatically in the late 1970s. Similarly, the premium exploded to the upside, then imploded, when silver prices were basically unchanged in 2000-01.
Possibly it is time for another collapse in the silver coin premium accompanied by a declining silver price.
Whatever the case, there is nothing historical to justify paying 40-50% premiums and more (as much as 100% a couple of years ago) for something (see Silver’s Bad Break) which hasn’t been a profitable investment on its own.
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!