Silver Coin Premiums – Factual And Farcical

QUESTION ABOUT SILVER COIN PREMIUMS

Disruptions to normal supply channels happen from time to time for various reasons. Also, people act irrationally at times.

Recently we saw a confluence of both events; and the results are attributable primarily to fear.

The fear was initiated when access to something desired, or needed, was inhibited (i.e., hindered, restrained, or prevented). At that moment, the actions of some individuals were indicative of expectations for the worst they could imagine.

Their fear and lack of prior preparation (if you really thought that owning silver coins was so important, why hadn’t you already  procured them?) led to an “either – or” alternative. Either pay the exorbitant premium and wait (how long?) for the coins; or, just wait.

A friend of mine, and a reader of these posts wrote:

“Ok…silver is trading at roughly $12.25 this morning…on paper. Now, go try to buy a silver coin. That’s right, EVERYONE is sold out of EVERYTHING. But wait, you can pre-order one for about $23 to 26 dollars a coin, and wait.” … Dave

If you were willing to “just wait”, you have already seen a partial restoration of sanity and normality in the market for silver coins.

The truly ironic aspect of this entire affair is that the highest premium of approximately 100 percent over the silver coin content, occurred against the backdrop of a 36 percent drop in the price of silver from almost $19 per ounce to just under $12 per ounce.

Another reader wrote the following:

“More likely $5 ounce silver on a paper chart will equal $50 ounce silver bullion in the hand.” … Daryl

I responded as follows:

“The available supply of silver is not different today from what it was two months ago. Nor has it changed over the years in such a way as to foster or dampen demand for it. What has changed, in an appreciable way, is some people’s insistence on owning it in a specific form, i.e., silver coins/silver eagles; and their willingness to pay ridiculous premiums for that privilege. Given that premiums for US Silver Eagle coins have historically been too high anyway, and that most disruptions in supply channels are temporary and probably due to responses to Covid-19 rather than actual supply-demand fundamentals for silver itself, it would appear that current premiums for silver coins are unjustified.”

There is a justifiable reason for a silver coin premium; but how much should that premium be?

There is a cost to fabricate and mint the coins. And, that cost is on a per coin basis. Hence, whether silver is priced at $13 or $16 doesn’t make any difference. Even with silver dropping in price from $18+ down to $13-14 very quickly, or rising a similar amount, shouldn’t appreciably change the per coin cost to mint them.

What will change, though, is the percentage cost. When silver is $16 and the coin premium for fabrication and minting is $4, it represents a premium cost of 25 percent. Thus, when silver approached its most recent high of $19, if the per coin cost remained the same (in most cases, it should), the percentage cost would decline to 21 percent.

On the downside, the opposite is true. At silver’s most recent low of $12, the silver coin premium had increased to 33 percent. Any of these changes in percentage were indicative of changes in the price of silver only; not of changes in the cost to mint and fabricate the coins. That cost remained the same in all examples at $4 per coin.

So what accounts for the additional $8 per coin/ounce premium that resulted in a price quote of “$23-26” – a 100 percent premium over the price of silver – for US Silver Eagle Coins? (Even at $23-26, it was a pre-order; with no clear expectation as to when the order would be filled.)

I would characterize it as “irrational demand based on fear” (even justifiable fear can lead to irrational behavior).

Initially, similar reactions were evident at grocery stores for such items as toilet paper and bottled water.  The anticipated future need of those things was brought forward in the form of immediate demand; but it did not result in price premiums of 100 percent.

So, again; why the additional “excess” premium? Possibly, some dealers saw it as an opportunity to stretch the limits of supply-demand parameters. Likely, though, they simply didn’t know what was happening, or how to account for it.

With silver coin premiums, nobody knows all the facts. And we shouldn’t presume to know or predict prices, events, etc. on the basis of little or no knowledge of the facts.

Those who justify their expectations and predictions on the basis of an extreme aberration, are being irrational in their thinking.

Those who are willing to pay unjustifiably high premiums for silver coins are being foolish.

If you don’t own any silver coins, or simply feel the need to own more, and your timeline is immediate, then look within your own circle for a private seller; make a deal.

(also see Silver Charts Say $5 Or Lower Is Coming)

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!