SILVER 101 Series: Don’t Get Fixated On The Spot Price
by Al Doyle for CoinWeek ……
Silver investors tend to check the current spot price before making a purchase. That’s a logical starting point, as the cost for physical metal is usually – but not always – related to spot.
Don’t expect former premiums to remain in place when spot plunges. Why does this happen? Lower prices means fewer sellers, so dealers have to raise their bids in relation to spot to purchase new supplies.
I would be very thrilled to have a pre-1965 silver dime for every time I’ve heard someone mindlessly blather about how they expected to obtain silver at around spot right after prices took a substantial plunge. Since spot (a paper price) can be and is manipulated by traders, it’s not a rock-solid indicator of what the metal is going to cost in the real world. Think of spot as theory and retail prices as reality. In precious metals and life in general, reality rules and theory drools.
Sometimes demand for the real thing increases faster than spot prices. That means some short-term hikes in premiums. We’re not talking about a massive surge in buying, but a moderate bump in retail demand. Since there are no great hoards of physical product waiting to be dumped into the hands of the general public, these moves take place for a week or two every few years.
Web sites and chat rooms are full of people who say they will buy silver once the price drops a few dollars or more. Those who make such statements usually assume they will be able to obtain the metal at something near spot, but recent developments prove once again that reality stomps on theory when dealing with physical product.
Spot silver has dropped from $33.17 on December 11, 2012 to $29 as this is being written. That 12.6 percent decline in spot hasn’t resulted in a comparable reduction in retail prices.
Bags ($1000 face value, or 715 troy ounces) of pre-1965 dimes, quarters and half dollars sold for 3 to 4 percent above melt in December 2012 when silver was in the $33 range. At that time, buy prices ranged just below spot to spot.
Fast forward three months for an entirely different situation. Two bullion industry market makers are currently paying $1.10 an ounce over spot for 90 percent and offering bags in the 22.6 times face range. Based on $29/ounce, that means bags are selling for an 8.4 percent premium over melt. Smaller amounts will cost a bit more.
Even those who are willing to pay the new levels may not be able to acquire silver. “Out of stock” is a common phrase at silver web site listings, and the same sad news has been dispensed to many potential buyers at local coin shops and over the phone.
One small silver dealer obtains much of his product from a large Midwestern source. An order for $500 face was placed and accepted last week. When the buyer went to pick up his order, he was told that just $250 face was available. Since this wholesaler is known for his utter dependability, this was something of a surprise.
The supply/demand and price situation in silver Eagles and Maple Leafs is similar to what is happening with 90 percent. Premiums and prices are moving up, and those who hesitate need to get out of the way as others in line are willing to pay the going rate.
Need more proof that spot numbers are not the ultimate guide to real world pricing? What if spot dropped to $15 tomorrow? Do you think that you could obtain silver for $5 or $6 an ounce over spot? Only the delusional and uninformed would expect to find silver in such a scenario.
Spot will have less influence on the retail market as the frequent manipulation of paper prices continues and public awareness of such trickery expands. Toss in growth in demand for physical silver coupled with tight supplies, and precious metals buyers may have to do a little work to determine fair prices in the future.
How can a person find such information? It’s very easy in the information age. Check a few major dealer web sites to get their buy/sell spreads. When postage fees are added to the total, small buyers can do as well or better making purchases at local shops rather than going the mail-order route.
So when is the right time to buy silver, and what would be a fair premium to pay? That’s a decision (emphasis on being proactive rather than passive) every individual has to make. Keep in mind that buying silver isn’t an all or nothing proposition.
What if someone wants to spend a few thousand dollars on the metal, but they aren’t sure about pulling the trigger? Put a portion of the funds into silver and see what develops in the future. Don’t expect to hit a home run on every buy, but a steady stream of singles and doubles will win the silver game in the long run.