Silver 101 : THE WORLD OF EXPENSIVE SILVER
by Al Doyle for CoinWeek ……
What will the bullion markets look like when silver reaches $100 an ounce?
Some would say the previous sentence is an exercise in optimism by silver bugs. How does $1000 an ounce sound? That doesn’t mean silver investors would rule the world if this scenario came to pass, as such prices would mean the U.S. dollar was headed for third world status. If it takes a grand to buy a silver Eagle, plan on spending $40 or more for a Big Mac.
Those who say this sort of looking ahead is futile when spot silver is under $30 need to examine the physical market more closely. Paper “spot” levels and real world prices for metal in hand are moving father apart.
With spot at $28.29 over the Easter weekend, the theoretical melt value for .900 fine pre-1965 dimes, quarters and half dollars would be 20.2 times over face. Anyone who expects to buy and sell at those levels will soon get a reality check, as dealers were offering 21.2 times face (or $1.40/ounce over spot) for 90 percent and pricing $1000 face value bags (715 troy ounces of silver) for around 22.3x face.
To put it another way, retail buyers are going to have to pay nearly $3 an ounce above spot for a product that sold for not much over spot throughout most of 2012. That’s a 10.3 percent premium above melt, which is up nearly 2 percent in just a week. Paper market prices are becoming less relevant as time passes, and this is one trend that won’t be fading in the future.
Growing premiums are a reflection of how demand is outpacing supply, and there is an identical situation going on in a much larger market.
Anyone who has tried to buy ammunition lately usually gets nothing, and what is available often commands much higher prices than it did less than six months ago. Stories of 500-round bricks of .22 LR that cost $18 to $22 in November 2012 selling for $75 are common in gun circles, and the situation isn’t expected to get much better during the rest of this year.
So what do ammo and silver have in common? Manufacturers can and have cranked up ammo production, which is something that can’t be done to any great extent with silver. Despite running plants 24/7, ammo shortages and skimpy supplies are the rule. If this is happening in a business that can make and import large quantities of new product, what will take place when silver demand rises without the ability to increase supplies?
A future price level of $100/ounce for silver is hardly unrealistic. Using the federal government’s optimistic inflation numbers, silver would have to reach $130 just to match the intra-day peak price of $50.35 on January 21, 1980.
Spot silver at the century mark puts the “official” melt value of a circulated silver dime at $7.15. Add strong demand for fractional pieces to a bullish market, and what could the premiums for 90 percent be in the future? Hint: Don’t expect to pay close to spot unless you want to be the object of laughter.
Another traditional silver option may be selling for a lower premium in a future world of expensive bullion. Circulated common-date Peace dollars and 1921 Morgan dollars are being offered by reputable merchants for around $33 apiece as compared to a a melt value of $21.65. That 52.4 percent premium won’t be sustained when all silver coinage and bars are in heavy demand unless the entire spectrum of physical silver is bringing monster prices over paper indications.
Those who want to purchase $1000 bags will need much more paper currency to complete that task in the future, and even having the cash to do so may not be enough. Silver has more potential to be in short supply than ammo, so it isn’t too hard to imagine one-ounce bars and silver Canadian Maple Leafs being rationed just like .223 rounds are today.
Small-scale silver buyers traditionally pay more per ounce than volume customers, but it wouldn’t be impossible to see that reversed in a world of limited supplies and meager allotments. You want all my silver when I have dozens of eager customers? What’s it worth to you?
Government-issued bullion rounds such as the Eagle, Maple Leaf, Austrian Philharmonic, Mexican Libertad and Chinese Panda won’t be easy to obtain, and premiums will be higher than current rates. Since the Royal Canadian and Austrian Mints have their own refineries, the Maple Leaf and Philharmonic may emerge as the coins with the fewest glitches in the supply chain.
At least one major mint will strike half-ounce rounds (Canada did this in 2006) when silver soars, and quarter-ounce pieces are another possibility. Mexico produces small numbers of fractional Libertads for the collector market, and this could be ramped up as demand grows. Private mints will do the same.
Could another player emerge in the modern silver bullion market? Poland is a possibility, as that nation ranks among the top sources for newly mined silver. Add in the considerable artistic talent at the Mennica Polska (Polish State Mint), and the Poles could become a popular choice for investors and collectors.
There’s one other future trend to consider. As silver becomes more expensive and sought after, businesses will offer to barter goods and services for the metal. While it won’t be sanctioned by government, silver will assume its historic role as honest money for at least a small segment of the populace. Such events have happened before, and history will repeat itself to some degree.