I was checking out a new facility by Eric LeMaire which lists the latest eBay prices for gold and silver as well as some common numismaticals from decades past. (You can see the statistics at this link.) What struck me were the huge premiums that silver investors are prepared to pay for one ounce coins right up to 100 oz bars. At a glance I could see an average premium of 124% for American Silver Eagles, 164% for Kookaburras and 105% for Maples. More sane premiums can be seen on the 100 oz at 35% which is nevertheless still a hefty premium compared to how much one may pay for other asset classes.
Now of course some of these buyers will be just coin collectors who don’t give priority to the metal price but the savvier silver buyer can avoid all of this by purchasing in bulk. For example, at one dealer you can buy a box of 500 Silver Eagles for a better premium of 52% over the spot price but that means stumping up over $7000. No doubt some can quote better deals to me. The main point is this though, the higher the premium the higher you have to wait to break even.
A 124% premium on eBay Silver Eagles means you don’t break even until silver hits $21.57 which is above the 20 year high set in March! If you buy in bulk as mentioned above, you break even at about $15 an ounce. The bottom line is no investor should be buying silver bullion at double the spot price. Even 52% smacks of inefficiency and a waste of investment capital.
Consider this, you pay a 52% premium and break even is $15. You set your price objective for selling out (this should be done before buying). Clearly it has to be something well above $15 to be worth your while. There are some things to consider when setting that price objective. What will be the hit when selling? Will premiums have narrowed by the time silver is over $20? I see some dealers are paying a dollar or more over spot just now. Will that last when buyers become sellers? If you go the eBay route you may preserve some of the original premium but the eBay and Paypal fees kick in thereafter.
Furthermore, you are not likely to time the top to perfection so you can knock another dollar or two off your final price - at best.
Then there are the tax considerations, capital gains tax kicks in and you lose some more of that upside profit. So it may be that you buy silver when its spot price is below $10 but you can’t even make a profit at $20 once every middleman gets their slice of your pie.
So why don’t people buy the silver ETFs instead and get their silver near to spot? Well they are and in bulk – over 1,500 tonnes has been added to the SLV stockpile since silver peaked in March to a new level of about 6,700 tonnes. That’s the equivalent of over 48 million Silver Eagles! You may have your doubts about “paper” silver but those who used the Barclays ETF (SLV) at its inception and rode it up to $21 would have had no qualms.
Or you could take delivery on the COMEX of 5,000 ounces of silver which will set you back over $50,000 at the current spot price plus fees. Then there are silver mining stocks which if liquid enough deliver a bid-ask spread far better than 52%! In other words, there are better ways to invest in silver than frittering away a lot of your hard earned cash on high premiums.
But you may object that the Banking system is in crisis and one needs to hold physical metal for the worst case scenario. That worst case scenario is a deflationary depression. The last time we had one in the 1930s silver crashed from $1.34 to its millennial low of 25 cents. When money is destroyed, assets prices collapse. Silver is a hedge against inflation – not deflation!
You may also point to the huge demand for retail silver bullion and say that this is proof that the silver is geared up for $50 by next year. Fifty dollars – Yes. Next year – No. An ounce of silver costs up to $21 on eBay but is available on the futures market at $10. What gives?
The answer is the retail silver price doesn’t reflect the true spot price of silver – not the other way round. The market for retail silver is squeezed because refiners are not upping production of these relatively unimportant rounds or bars. When customers like the Barclays ETF adds the equivalent of 48 million Silver Eagles in 8 months I think you get the picture. It’s as simple as that and I can prove it. Why exactly would the international market price of silver be less than the retail price? The market price is the price based on 1000oz bars and you can buy them for 59 cents over spot at one reputable dealer. I will repeat that – 1000 oz bars are 5% over spot and Silver Eagles are 50% or more over spot.
Why is there no high premium on 1000 oz bars? The answer is because there is plenty of them to be had - the more common the item, the lower the premium. The scarcity of small investor silver is not a shortage of silver, it is a shortage of small pieces of silver pressed and stamped into pretty pictures.
If you cannot afford the COMEX price or bulk retail purchases then I think you should not purchase silver at all, just buy gold because after subtracting those hefty premiums your silver may well underperform the same investment in gold bullion.
Finally, silver is heading for a substantial rally soon. It will be profitable but it won’t go as high as you think it will. Furthermore it will last a matter of months and not years. It is a narrow opportunity and one must invest efficiently to make the most of it. So keep your premiums low and good luck.
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This article has 18 comments:
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sheople
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63 Comments
Dec 02 07:38 AM-
Golden Oxen
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32 Comments
Dec 02 08:34 AM-
sandspider
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51 Comments
Dec 02 09:13 AM-
waldipup
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36 Comments
Dec 02 10:17 AMcounter analysis.
It would be incumbent to explain away the premise that there is a shortage of smaller minted silver entities to counter the argument that Comex is the correct value.
If you cant do so, then it's just opinion as to whether the Comex or the cash market
represents the true price.
Poisunelly , I'm waiting to see how much physical offtake there is from the Comex on the Dec. 08 , and the March 09 delivery months-
No way the true price is double the Comex price and savvy investors of the larger variety are not going to glom up the silver at half price via inexpensive Comex delivery.
So lets let the market tell us who's right -
If nobody takes delivery , it would be hard to argue that the high premium prices are for real , and not just due to the fabrication supply/demand
imbalance.
If silver flies out of Comex inventory faster than a speeding bullet , then we've been looking at an artificially depressed Comex price , and that would then be hard to argue against.
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User 30121
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326 Comments
Dec 02 10:59 AM-
User 30121
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326 Comments
Dec 02 11:01 AM-
JoeSixPack
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10 Comments
My Website
Dec 02 01:06 PM-
GMiki
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319 Comments
Dec 02 02:04 PMWhat a strange thing to say unless you're a time traveller. How far ahead have you seen, and what else can you tell us?
Speaking of predictions, have you read *The Black Swan* about the unpredictablity of markets?
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User 311193
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1 Comment
Dec 02 02:36 PM80 to 1 ratio and coinage being the easier sell when the time comes
is just one of many reasons that may justify the premium compared to gold.
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pungent
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1 Comment
Dec 02 05:35 PMI am one of those oddballs buying large lots of Ag coins on EBay. I also own a significant amount of SLV. My acquisition of Ag coins is for disaster abatement purposes; specifically US currency devaluation. The govt continues to debase our currency such that your dollars are shrinking in your wallet while you read this. If an absolute disaster happens to _our_ Zimbabwean dollars, I have a backup plan. How 'bout you? If I'm wrong, that would be a good thing and I simply sell off my coins (OK, some coins ... they _are_ pretty). Probably at a decent profit. Lastly, with regard to your comment about 1930s silver crashing to 25 cents, I don't doubt this. But you have forgotten just how much breakfast that 25 cents would buy the next morning.
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Long John Silver
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17 Comments
Dec 02 08:54 PMWhy wouldn't they try to get a spike up in prices after carefully accumulating a large stockpile?
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Zeb
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4 Comments
Dec 03 01:13 AM-
Littlegrey
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3 Comments
Dec 03 01:35 AM-
NCPL
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34 Comments
My Website
Dec 03 02:55 AMThe MD said gold is gonna double to $2000 coz of hyperinflation.
www.youtube.com/watch?...
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GMiki
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319 Comments
Dec 03 12:18 PM-
NixonFordCarterReaganBushClinto...
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2 Comments
Dec 03 09:25 PMThis one is easy...
1) Comex silver is (purposely) VERY HARD to acquire, and the Comex does all it can to make sure you have to jump through hoops to actually take delivery.
2) Comex 1000 oz silver bars must be re-assayed to be resold. Not too many people are interested in doing that and/or melting it down and pouring it into smaller bars or rounds.
3) I agree with the author that from an INVESTING point of view, the high premiums make for a bad deal, and an assuredly losing investment. The likelihood is that (at best) the "investor" will break even. HOWEVER, most people who are buying (AT PRESENT) are doing so as a "store of value" to protect from the distinct possibility -- perhaps INEVITABILITY -- of the US Dollar hyperinflating and collapsing to worthlessness.
4) Those who would laugh at #3 are the same people who too easily forget that only six months ago we were staring down the barrel of $147 oil, $4.50 gal gas, and worldwide inflation. (Note: Worldwide, inflation is STILL a problem). These people have much too short of an attention span. Deflation will end when the deleveraging ends. That will, NO DOUBT, happen soon enough.
5) When inflation returns, people will realize that the "obvious" trade (which RIGHT NOW is the US Dollar and US Treasuries) is, AS ALWAYS, the *wrong* trade.
6) The "final" bubble is US Treasuries. Once that blows, the party is over, and then people will WISH they had "overpaid" for precious metals.
7) I do however agree that right now gold is the better hedge against loss via hyperinflation.
8) Please don't even use the *word* "deflation" as an argument. We are NOT experiencing TRUE MONETARY deflation. This is merely an "unwind", and a LOT of people are being set up for a big fall when it ends - (soon enough).
----------------------...
On Dec 02 10:17 AM waldipup wrote:
> ...It would be incumbent to explain away the premise that there is a
> shortage of smaller minted silver entities to counter the argument
> that Comex is the correct value....
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Littlegrey
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3 Comments
Dec 04 01:23 AMOn Dec 03 09:25 PM User 312287 wrote:
> To "waldipup",
>
> This one is easy...
>
> 1) Comex silver is (purposely) VERY HARD to acquire, and the Comex
> does all it can to make sure you have to jump through hoops to actually
> take delivery.
>
> 2) Comex 1000 oz silver bars must be re-assayed to be resold. Not
> too many people are interested in doing that and/or melting it down
> and pouring it into smaller bars or rounds.
>
> 3) I agree with the author that from an INVESTING point of view,
> the high premiums make for a bad deal, and an assuredly losing investment.
> The likelihood is that (at best) the "investor" will break even.
> HOWEVER, most people who are buying (AT PRESENT) are doing so as
> a "store of value" to protect from the distinct possibility -- perhaps
> INEVITABILITY -- of the US Dollar hyperinflating and collapsing to
> worthlessness.
>
> 4) Those who would laugh at #3 are the same people who too easily
> forget that only six months ago we were staring down the barrel of
> $147 oil, $4.50 gal gas, and worldwide inflation. (Note: Worldwide,
> inflation is STILL a problem). These people have much too short of
> an attention span. Deflation will end when the deleveraging ends.
> That will, NO DOUBT, happen soon enough.
>
> 5) When inflation returns, people will realize that the "obvious"
> trade (which RIGHT NOW is the US Dollar and US Treasuries) is, AS
> ALWAYS, the *wrong* trade.
>
> 6) The "final" bubble is US Treasuries. Once that blows, the party
> is over, and then people will WISH they had "overpaid" for precious
> metals.
>
> 7) I do however agree that right now gold is the better hedge against
> loss via hyperinflation.
>
> 8) Please don't even use the *word* "deflation" as an argument. We
> are NOT experiencing TRUE MONETARY deflation. This is merely an "unwind",
> and a LOT of people are being set up for a big fall when it ends
> - (soon enough).
>
> ----------------------...
>
> On Dec 02 10:17 AM waldipup wrote:
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butlerbuster
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15 Comments
Dec 04 01:41 PMWhen they do catch up to demand, premiums on these coins will collapse. Then actual silver investors will make far more by investing in any number of other forms rather than coin. The silver ETFs such as SLV, silver mining shares, or physical large bar form.
SIlver users and actual investors (which doesn't count dim bulb Ebay buyers), are buying physical silver on the Comex for the spot price, in 1000 oz bar form.
Many large dealers such as Apmex and Monex and Tulving sell 1000 oz bars of silver for less than a dollar over spot. Millions of ounces of ACTUAL physical silver trade at less than a dollar over spot every week. Both investors and industrial consumers. You think refiners or industrial users are paying $20 an ounce for silver? LOL!!!!
We can ignore the futures and derivitiaves, and still understand that there are 2 markets for physical silver. The REAL global physical market, which accounts for approx 1 billion ounces of physical silver annually, and the puny and currently distorted retail market, which accounts for way less than 1 tenth that amount. Which one better represents wholesale silver in physical form/ Ebay? lol.
THAT global phjysical market is the 'real' price. Not some inflated temporary blip on premiums currently occurring on Ebay from dim bulbs willing to pay far more for Beanie Babies than what they'll be worth 6 months later.
If you want to make money on long term undervalued silver, avoid those bloated (and soon to fall) coin premiums like the plague. Buy silver in the ETF, or 1000 oz bar form, or from a large dealer, or buy mining shares.