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Ardent Listener
Administrator
USA
4841 Posts |
 Posted - 12/02/2008 : 19:57:09
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WHY PAY HIGH SILVER PREMIUMS?
Roland Watson
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 mean 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 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.
2 December 2008
Further analysis of silver can be had by going to our silver blog at You must be logged in to see this link. where readers can obtain a free issue of The Silver Analyst and learn about subscription details. Comments and questions are also invited via email to silveranalysis@yahoo.co.uk.
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No doubt you get a bigger bang for your buck with 1000 ounce bars. But the funny thing about them is few people are interested in buying a sawed-off chunk of one. And fewer yet can afford one. I just didn't like Watson saying if I can't afford a 1,000 ounce bar I shouldn't buy any phyical silver. Thanks for your concern Watson, but mind your own business! I'll decide that for myself. And you don't have to pay a "50%" premium anyway. I don't.
Until supply of small bar silver catches up with demand then the asking price will remain high for them. So is there a supply manipulation of small bars or is it that people are so dam scared of the financial news that they are out-bidding each other for it?
"Come Watsom. Come! The game is afoot." - Sherlock Holmes.
Ardent Listener
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Think positive. |
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natsb88
Administrator
USA
1850 Posts |
Posted - 12/02/2008 : 20:09:53
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So basically he says we have no business investing in silver unless we can cough up $11,000 for a 1000-bar or $50,000 for a COMEX contract?
I guess if you sit behind a desk long enough, all you know how to do is push paper. |
Nate
The Copper Cave
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oober
1000+ Penny Miser Member
USA
1304 Posts |
Posted - 12/02/2008 : 21:08:41
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I'm in for the long haul, As I do try to pay the smallest premiums possible, I dollar cost average, I bet at my $14.15/Toz DCA, is still less then a lot of investors who got in at 16+
Premiums are coming down. Picked up 9 SAE's for $3 over spot. Not great, but not horrible either.
Funny thing was my dealer wouldn't go below 10x face on junk, when spot was calling for less then 9 (if you pay for a fair premium). He's having more problems getting junk then bullion. Whoda thunk!! |
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Nickelmeister
Penny Hoarding Member
Canada
588 Posts |
Posted - 12/02/2008 : 22:29:06
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| In a true WTSHTF scenario (if that is what people are purchasing silver in anticipation of), "junk" silver would be the most useful, recognized and easily tradeable format. Try buying a loaf of bread with a 1000 oz bar. Or even a sliver shaved off of a 1,000 oz ingot. |
www.WinnipegGoldBuyer.com
Standing offer for sale of quality, second-hand solid gold jewellery:
<$100 USD worth - spot +25%, plus actual shipping
$101-500 worth - spot +20%, plus actual shipping
$501-1,000 worth - spot +15%, plus actual shipping
$1,001+ worth - spot +10%, plus actual shipping |
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Nickelless
Administrator
USA
5580 Posts |
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moboman
1000+ Penny Miser Member
USA
2555 Posts |
Posted - 12/02/2008 : 22:42:32
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| It seems like silver has been hovering around 15/oz for a while now. It's still kind of hard to get. But, it's somewhat attainable. |
"99% of all lawyers give the rest of them a bad name" 
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Lemon Thrower
1000+ Penny Miser Member
USA
1588 Posts |
Posted - 12/03/2008 : 12:45:39
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in the event the OP's question was not rhetoricao, i would not that the etf is not the same as physical.
i have bought some silver ware (forks, knives) at or below spot. (last 3 months). even when i am above spot, the price is better than the premium on other forms of silver. the price per ounce is higher for larger collections. when you buy one setting that can be given as a gift, its next to impossible to buy close to spot. |
Buying:
Peace/Morgan G+ at $15.00
copper cents at 1.3X
wheat pennies at 3X
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fb101
Administrator
USA
2856 Posts |
Posted - 12/03/2008 : 17:07:42
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About the hint of inflation (hyper or otherwise)
Yesterday Pilgrims Pride filed bankruptcy.
They are either the largest or second largest chicken producers in the country.
They are filing because the feed cost has soared, but chicken prices haven't.
Either they will raise their prices, or they will die and the shortage of supply
will cause prices to rise. Either way, we will be paying more for chicken.
And that, the way I hear it from wall street, is the coming deflation I'm supposed to fear.
Can you say STAGFLATION? |
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Edited by - fb101 on 12/03/2008 17:34:36 |
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Why Pay High Silver Premiums?
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