In 1972, a bag ($1000 face value) of “junk” US silver coins sold for approximately $1300-1350. The average closing price of silver that year was $1.68 oz; hence, the silver content (715 ounces) value was $1200 per bag. The remaining difference was a premium of about ten percent.
A lower silver price would generally result in higher percentage premiums because the face value of $1000 represented a ‘floor’ which limited the risk of holding the coins. In other words, the real investment risk was limited to the amount you paid over the $1000 face value.
For example, if the price of silver were to fall to $1.00 oz., the silver content value of the bag would be $715 ($1.00 oz. x 715 ounces) Since the coins were legal tender and still accepted at their face value, though, the full bag of coins retained its face value of $1000.
WILD FLUCTUATIONS IN COIN PREMIUMS
The premiums on junk silver coins has fluctuated wildly over the years. During the 1970s, as concern about inflation and its effects took their toll, the premiums on these coins rose considerably.
Then, something changed. The price of silver rose dramatically and the premiums declined. When silver prices peaked at $49 oz. in January 1980, a $1000 face value bag of US silver coins had a silver content value of $35,000.
The bags of coins, however, were selling at a discount of as much as 10-20 percent. Some of the discount was due to the fact that there was a glut of silver coins put on the market. People were selling anything with silver in it, including coins that had been stashed away for years.
In retrospect, we can see that there was little justification for high premiums on the coins since the face value floor of $1000 didn’t provide any protection with bags selling at $30,000 or more.
The silver price collapse shortly thereafter was so severe and long lasting that interest in the coins faded. The coins were commonly available for their silver content with little or no premium.
MORE COIN PREMIUIM VOLATILITY
A couple of decades later, concern about Y2K juiced the market for junk silver coins. Even with the price of silver unchanged in 1999, the premiums on the coins jumped to 50%.
By January 3, 2000, investors were convinced that the risk from Y2K was unwarranted and began selling. They sold junk silver coins throughout the year and into 2001, forcing prices lower until the coins sold at a discount again. By that time, it was cheaper to buy bags of US silver coins than it was to buy 100 oz. bars of silver bullion.
CURRENT SIVER COIN PREMIUMS
Today, retail investors are paying premiums of 40% on junk US silver coins. They have paid higher premiums recently, too, and they seem to be willing to pay pretty much any premium asked in order to own the coins.
The saving grace of buying pre-1965 US silver coins at 40-50% premiums right now is that they seem like a bargain compared to buying freshly-minted US Silver Eagles at a 70% premium. (Shouldn’t it be the other way around?)
ANOTHER COLLAPSE IN SILVER COIN PREMIUMS?
As we noted above, there were huge declines in US silver coin premiums in 1980 and, twenty years later, in 2000.
It has been just over twenty years again since the last collapse in silver coin premiums. Will we see another collapse in premiums?
Some will argue that demand for junk US silver coins will always be strong enough to maintain a high premium over bullion bars. Maybe; but that is not necessarily so.
The premium for junk US silver coins rose and collapsed during a period when silver prices were rising dramatically in the late 1970s. Similarly, the premium exploded to the upside, then imploded, when silver prices were basically unchanged in 2000-01.
Possibly it is time for another collapse in the silver coin premium accompanied by a declining silver price.
Whatever the case, there is nothing historical to justify paying 40-50% premiums and more (as much as 100% a couple of years ago) for something (see Silver’s Bad Break) which hasn’t been a profitable investment on its own.
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!