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So How Am I Supposed to Buy Silver in this Crazy Market?
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(April 20, 2013) Precious metals accelerated their history-making slide early this past week, with gold and silver both losing some 15% of their dollar value between Thursday 4/11 and Tuesday 4/16. Demand for physical precious metals in convenient forms began to rise during last Friday’s collapse, and was fast and furious all day Monday and Tuesday. The availability of gold bullion coins and bars so far has suffered a bit, while silver in nearly all its retail bullion forms has been vacuumed up so thoroughly that it has virtually disappeared from dealer and distributor stocks. What's a silver buyer to do?
We wrote here two weeks ago about the declining availability of 1-ounce silver coins such as silver Eagles, Maple Leafs, and generic 1-ounce rounds. At that time there were delays due to the fact that there is only so much capacity at the various government and private mints to turn out these labor-intensive bullion coins.

When silver broke through the $23 spot level on Monday 4/15, demand increased incredibly, with orders coming in at a rate about 10 times higher than what had been normal in the past few months. Product was still available for delivery in the near future, and premiums had started to creep up a bit - then, things started to get out of hand.

When we ordered silver Maple Leafs on Tuesday, we were told the wait would be about five weeks. By Thursday, the news was even worse. By then, the US Mint got so behind in silver Eagles that dealers and distributors were asking as much as $6 over spot for ready-to-ship product, and in excess of $4 over spot for delivery of silver Eagles weeks in the future. Many distributors stopped taking orders, as they had already pre-sold all the allotments of coins that they would likely receive for the next several weeks.

Other retail-friendly forms of silver became similarly effected. 100-ounce silver bars are now wholesaling (when you can find them) for around $1.00 per ounce over spot, as opposed to the former levels of 35c to 50c. 10-ounce silver bars cannot be found anywhere. Circulated pre-1965 US silver coins are now trading at 15% to 18% over spot on a whole sale basis.

So at this time, we are halting sales of silver. Rather than asking our clients to pay some ridiculous premium for silver products that they would not even receive until many weeks from now, we have stopped taking new orders. When product becomes available in a timely fashion, and premiums return to something near normal, we will once again be in the silver business.

Silver is now trading at about half of what it was in April of 2011, at prices lower than they have been since October of 2010. The latest downturn in the silver price has attracted a lot of interest among the silver faithful, who are finding the current shortages and higher premiums to be highly irritating.

So, for those of you who want to acquire silver at today's market prices, without suffering today's high premiums and delays, we have three suggestions.

The first and easiest path is to buy units in the iShares Silver Trust Exchange Traded Fund (ETF), which goes by the symbol SLV, in a quantity equal to the amount of silver that you are looking for. At some point, in a few weeks or a few months, the mints will finally catch up with demand, and premiums on silver Eagles, silver Maples, .999 silver rounds, and other silver bullion will come down to earth. When that finally happens, you can sell your SLV position, and buy physical silver at regular premiums.

For large positions, you can buy silver futures contracts on the CME. This is a way to buy silver in 5,000 ounce contracts, without necessarily taking delivery. To allow enough time for 1-ounce silver product premiums to settle down, we might suggest the December 2013 contract. When premiums are more reasonable, you then sell those contract(s) and buy silver coins.

Or, if you want to purchase actual physical silver outright, there is no shortage of available bullion. In fact, US depositories and bonded warehouses are holding near-record amounts of thousand-ounce delivery bars of .999 silver. We recommend that you buy them from a supplier who has them in storage. (call us if you want a recommendation). When you do this, you will get a list of the serial numbers and actual weights of each bar that you purchase. You can always take delivery of these 70-pound bars yourself, but we don’t recommend it. Shipping is dreadfully expensive on these behemoth bars, and once the bars are removed from certified storage, they are tough to sell for a decent price. It’s best just to leave them in your account at the bonded warehouse. Again, if in the future you want to make the switch and take possession of more convenient forms of silver (Eagles, Maple Leafs, etc), you can simultaneously sell your thousand-ounce bars and buy the products that you want.

As we wrote the other week, producing silver coins is a time- and labor-intensive process, and ramping up production can only go so far when demand increases something like 1,000%. Thus, today's shortages.

For gold, the story is different. The US Mint as of today has sold 148,500 1-ounce gold Eagles in April, compared with their sales for the entire month of March of only 54,000 coins. So far, our national mint has responded pretty well to increased gold demand.

Silver, not so good. In March, the Mint sold 3,356,500 silver Eagles. This month, with demand screaming through the roof, so far they have only sold 2,387,000 coins. They are now allocating silver Eagles to their distributors on a quota system.

This allocation scheme sets up a perfect demonstration of how a free market works. It goes like this: Mint distributors are each entitled to a proportional shares of whatever amount of Eagles that the Mint releases each week. In the current climate of intense demand, distributors are finding it easy to raise premiums on these (temporarily) scarce items. Market-wise, these Mint-authorized distributors are doing the only right and logical thing when blessed with supplies of an item that is in short supply - they are making out like bandits.

-Richard Smith, April 20, 2013

 

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