The views and opinions expressed in this article are those of the authors and do not necessarily reflect the policy or position of JM Bullion, Inc.
In this article, I will explain first how and why silver bullion premiums have aggressively increased since the middle of summer 2015 AND how and what I am doing to take advantage of the current premiums via a bullion form sell and buy arbitrage.
So why are silver premiums so damn high right now?!
In short silver premiums have increased due to a recent combination of higher Silver Bullion Demand & lower Silver Bullion Supplies.
Silver’s paper spot price has recently fallen to 6+ year lows (touching a low price near $14 oz USD) yet physical silver bullion prices have not fallen. Instead silver bullion prices have remained flat due to a recent lack of physical bullion supplies and higher investor demand.
I can hear the cynics out there saying, “That’s bull! The dealers are taking advantage of everyone!”.
Well, yes and no. I’m not going to deny that dealers partly use these moments of high demand to expand their profit margins and company war-chests via larger premium charges. BUT, I will also point out that, without having an adequate bullion inventory on hand, if a dealer simply sold their smaller stack to the public at standard razor thin bullion premiums, they will quickly run out of inventory, and they may also end up losing both customer base and, potentially, their business in the process.
How is that?
Think about it: without inventory you would essentially become a back-order promise dealer, building up a massive short position in silver while angering your customer-base as you sit on their good funds making them wait on their purchased products’ delivery from the mint.
What I am saying to you is, there is a price equilibrium that needs to be balanced between today’s now LOW SUPPLY & HIGH DEMAND for silver bullion (by the way, if this shortage bleeds into gold bullion like it did in 2008, we’ll likely be in the midst of another banking crisis).
Now for those who remain confused, I would like to explain:
- How and why silver bullion supply constraints are happening.
- Inventory shortages almost always happen during periods of dramatically falling spot prices.
- Bullion premiums spike as a consequence.
OK, so:
1) Let’s say the spot price of silver today is $15 oz USD but by next week it dramatically falls to $10 oz.
2) Average annual demand for physical silver is about $1,000,000,000 USD (aka one billion dollars).
Let’s say in this example that demand in US dollar terms remains flat, meaning demand remains at $1 billion USD for the year. If that is the case, and silver bullion premiums stayed flat, then the silver bullion industry’s manufacturing output would need to increase by 50% to meet demand. Not going to happen in such a short time-frame.
For example, the largest silver salesman in the world, the United States Mint, would need to increase their currently claimed minting capacity from just over 66 million coins to around 100 million coins to meet the demand of the above example.
For any manufacturer of real world goods, a 50% increase in production over the short term is huge. In other words, silver bullion supply will not meet this increased silver bullion demand this fall or winter, most likely.
So, if the US Mint cannot meet demand with increased supply capacity in the short run, how else might dwindling inventories be managed?
Higher premiums (aka higher prices) for American Silver Eagles in the short run and, consequently, for other silver products (as Silver Eagles are the #1 silver bullion product and they, along with 90% junk silver, typically lead the bullion markets premium momentums).
Now, over the long term, the US Mint might be able compensate for a 2Xs or 3Xs demand over a 5 or 10 year stretch, but certainly not, say, doubling bullion demands in the short term.
Real world manufacturing operations don’t move that fast; they are not that scalable short term.
Within the bullion industry, we have witnessed the recent domino effect:
- This summer, on July 7th, the silver spot price fell heavily and the US Mint went on “allocation,” limiting the supply of newly struck American Silver Eagle coins to dealers.
- This silver supply constraint, in the midst of rising investor demand, forced bullion dealers to raise price premiums as their inventory levels shrunk.
- Rising premiums on US mint products induces buyers to purchases other sovereign silver coins with lower premiums over spot, like Canadian Maple Leaf coins, as well as privately-minted products like Sunshine Minting bullion bars and rounds.
- This increase in demand for all silver bullion products creates the same manufacturing constraints for every other sovereign and private mint organization the same way it affects the US Mint.
- This supply vs demand problem compounds and typically feeds on itself producing extended lead times until spot prices flatten, demand cools, supplies increase, premiums shrink, and bullion investor back-orders are finally delivered.
The aforementioned recent spot price vs bullion supply reverberations in the silver bullion market test one’s basic Economics 101 knowledge. It just so happens our educational system doesn’t teach much in the way of common sense economics (Austrian School) nor how individuals or businesses manage money (but that is a whole ‘nother can of beans which I won’t open here).
The bullion industry also does a poor job of explaining how and why premiums expand and shrink.
Enter internet armchair “silver bullion experts” who often comment on what is happening with erroneous opinions spreading confusion and disinformation on the topic. Hopefully, in this regard, I have been helpful in clearing up any confusion you may have had.
Remember that the physical precious metals bullion market is minuscule relative to all other asset classes. We’re talking less than $20 billion USD in physical silver bullion gets mined and sold annually versus a global financial market that moves $10’s of trillions in USD annually.
Small shocks in silver spot price volatility can create major silver supply shortages and doubles or triples in demand, which the silver bullion industry most likely cannot handle at the moment.
This is a big reason why I suggest, if you haven’t got any bullion yet, do so now, even if you only get some to start. Then dollar cost average buying week to week, to get yourself into a position with which you feel comfortable.
I, myself, and many other silver industry experts believe there will come a day when, in order to get physical bullion, the price will be extremely cost prohibitive . . . so much so that if you don’t have it, it will be hard to pull the trigger on buying high premium bullion, most likely when you need it most.
Best to get your position settled before this chaotic time-frame appears before us.
Now, as for what I am doing this moment to take advantage of the current high premiums on American Silver Eagle coins? I so happen to have bought a lot of American Silver Eagle mint cases in 2012 and 2013 and, thus, I have some on-paper loses (but I had some peace of mind and good nights’ sleeps throughout those years, which I wouldn’t have had if that capital had been the shaky banking system).
Regardless, I have recently sold 2 of my own mint cases on eBay (getting paid by PayPal only) in order to take the proceeds and buy 100 oz bullion silver bars simultaneously.
The 100 oz silver bullion bars at the moment have substantially lower premiums over spot. Doing this “flip” or silver bullion arbitrage at the moment allows me to add about 20% to my underlying silver sold, while also allowing me to write off $3000 USD on my personal tax return for 2015 as my purchases in 2012 / 2013 were at substantially higher spot prices. (My disclaimer: I am not a tax accountant nor your financial adviser, therefore you should consult accredited professionals if you have further questions.)
Thus, I gain silver on the sale and buy. Plus, I can also write off a substantial amount on my taxes (which I will in 2016), and then turn around and buy more silver with the tax rebate proceeds.
What are you doing to take advantage of the current situation in the silver bullion market?
You can continue following my writing here on JMBullion.com as well as on social media channels like my Twitter page.
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Thanks for reading my thoughts, I wish you and yours the very best.
Research provided by James Anderson on behalf of JMBullion.com.
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