Why do investors pay without exception for the privilege of owning silver in certain forms?
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 sizable 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 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!
Kelsey Williams
Precious Metals Analyst