By Numismaster.com | Aug. 27, 2012
In the past three years, the U.S. Mint has sold more than 100 million 1-ounce silver American Eagle bullion coins with a stated face value of $1. At $30 per ounce silver, that is total sales of more than $3 billion.
Obviously, this quantity of coins is too many to be absorbed by collectors seeking a single coin or a 20-coin roll from each year as part of a collection. The bulk of these coins are being purchased by people thinking these are an appropriate means to invest in the price (as opposed to the actual physical commodity) of silver.
In the present market, silver Eagle buyers are paying a premium over silver value to obtain these silver Eagles. Unless buyers have a lot of experience, they might not be aware of the possibility that the premium they are paying can decline or disappear, which might cost them some of their gains when they go to sell.
That is why it pays to keep track of premiums on all forms of silver coins in order to get the most for your money at any point in time you are looking to be a buyer.
There are a few advantages in buying silver Eagles as a way to own physical silver. They are American, which can be considered a patriotic choice. They are struck by the U.S. Mint, which should be a trustworthy guarantee of weight and purity. They have legal tender status, which means they can cross borders without having to pay customs taxes. They are also struck of commercially pure .999 fine silver and weigh exactly one troy ounce, which makes it easy to track the value of the silver content.
However, there are also minor disadvantages in acquiring silver Eagles currently for the value of the silver. The first is the premium above silver value that it costs to purchase the coins. It is much higher now than for many other competing options such as U.S. 90 percent silver coins (the circulating dimes, quarters and half dollars struck up to 1964), U.S. 40 percent silver half dollars that were struck for circulation from 1965 through 1969, privately manufactured .999 fine silver bars and rounds in sizes from 1 ounce and larger, Canada 1 ounce silver Maple Leaves (which have a higher legal tender value of $5 Canadian), Austria 1 ounce silver Philharmonics and some coins issued by other countries.
Another minor negative is that even at a content of a troy ounce silver Eagles are somewhat impractical for use as circulating money should the U.S. dollar fail. Smaller pieces such as U.S. 90 percent silver dimes and quarters would be far more functional to buy a loaf of bread or a gallon of gasoline, for instance.
As the price of silver becomes more volatile, owning physical silver in the form of silver Eagles can be financially less rewarding when the premium is high than buying other forms such as I listed above. Let me give you a specific example from 1996-1997 to demonstrate this point.
In 1996, billionaire Warren Buffett’s Berkshire Hathaway purchased contracts for delivery of 129.5 million ounces of physical silver in March 1997. Normally, an investor who purchases large quantities of a commodity never intends to take physical delivery. Instead, before contract maturity, the contract owner usually decides to sell the position or to replace it with new contracts that mature further into the future.
Warren Buffett strained the London market when he indicated his intention to take physical delivery of all 129.5 million ounces at contract maturity in March 1997. There simply was not enough silver available to make delivery in the vaults for the London Bullion Market Exchange, even though the London market is the largest silver trading market in the world. The problem was further compounded because the London silver contract standard was for 1,000 ounce bars refined to a purity of .9999 (also called four-nines purity). Silver stored in warehouses for the New York Comex are 1,000 ounce bars only refined to a standard of .999 purity (also called three-nines purity), which meant that COMEX bars did not qualify, as is, to fulfill LBME contracts.
In order to use the COMEX silver to fulfill a London contract, the COMEX bars had to be melted and refined to the higher purity, then the bars had to be shipped to London to be placed into the LBME vaults there. At the time, transportation costs were roughly 6-7 cents per ounce and there was some cost for the refining work.
A huge silver supply squeeze developed in London market. The spot price of silver jumped from roughly $6 per ounce before brokers realized they needed to deliver physical silver to Berkshire Hathaway to more than $7 in the United States and close to $7.40 in the London market in March 1997.
As the spot price of silver jumped about 15 percent during this squeeze, silver bullion-priced bullion products that traded on the wholesale market below the silver spot price pretty much rose in price right along with the change in spot.
Silver Eagles, on the other hand, enjoyed little to none of this jump in the silver spot price. The only physical silver in demand was forms trading wholesale for less than the spot price, so that refiners could profitably melt them into .9999 pure, 1,000-ounce bars for delivery in London. This meant that high-premium coins such as silver Eagles were not of interest to the major buyers.
When the spot price of silver was $6 before the run-up, we were buying small quantities of silver Eagles from customers at $6.50, which was 50 cents above spot. By the time that silver spot reached $7, we were then paying 50 cents below spot – meaning that we were still paying only $6.50 per coin for small quantities.
In markets where the spot price of silver rises quickly, or to a large degree, more supplies of physical silver tend to be liquidated. Because of this, it is typical for the premiums to fall a bit on all bullion-priced forms of silver. Where we see the largest drop in demand in such markets is with the higher-premium issues.
I personally anticipate much higher silver prices in the not-to-distant future. If silver does not surpass $50 by the end of 2012, I expect it to reach that level early next year. In this scenario, buying silver Eagles as a way to own physical silver could underperform other options, by perhaps as much as 5-10 percent. Keep this in mind if you are looking to acquire bullion-priced physical silver.
By the way, Berkshire Hathaway did not get delivery of all 129.5 million ounces of silver in March 1997. As I understand it, Berkshire Hathaway accepted payments from those who owed delivery on the contracts in order to grant a multi-month extension of the due date. Once this issue was settled, the price of silver fell back down below $7.