"Everything you need to know about gold"
SILVER SEDIMENT
“Sediment is solid material that is moved and deposited in a new location. Sediment can consist of rocks and minerals…” and “matter that settles to the bottom…”
The silver price closed on Friday at $22.30 oz., down $1.15 from its closing price the day before.
What is worse, though, is that it follows a drop of $.50 oz. on Thursday. And, on both Thursday and Friday, the silver price collapsed early in the day, found the bottom level and stayed there.
There is a two-fold risk for investing/owning Silver Eagle coins. Below is an update and further information about the coin premiums…
SILVER INVESTORS – MONEY TO BURN?
Over the past two years, there have been some wild and crazy things happen with regard to premiums charged and paid for various physical silver investment products. For the privilege of owning silver in certain specific forms, investors are paying through the nose; and, apparently, willingly so. WHY? Is the cash burning holes in their pockets?
I just completed a review of current market premiums for both silver and gold products. It shouldn’t be a surprise as to what particular product heads the list for the most expensive premiums. Investors are having a torrid love affair with U.S. Silver Eagles.
WHY SILVER EAGLES?
The current ask price for a 1 oz. Silver Eagle coin includes a premium of 67 percent. Even on the bid side, the premium is 57 percent. The bid-ask spread of 10 percent (57 -67 percent) is the widest of any common silver product (bullion coins, junk coins, ingots, bars, etc).
The amount of premium declines considerably as one looks at alternatives. For example, the premium for junk U.S. silver coins (1964 and earlier) is only 43 percent. Definitely not a bargain, but you can get sixteen percent more silver for your money.
The reasons for owning either Silver Eagles or junk silver coins for most investors is pretty much the same. They want to protect against the possibility of a currency crisis or breakdown the financial system that results in a need or desire to trade in ‘real’ money. Things like legal tender and face value are also applicable, in addition to owning something tangible and recognizable that will be accepted willingly and freely. Those are good reasons, so why not go with the cheaper alternative?
WHY IS THE SILVER COIN PREMIUM SO HIGH?
Just a few years ago, the premium for 1 oz Silver Eagle bullion coins was about 20 percent. That still sounds high, but it is not unreasonable if you look at it on a “per coin” basis. With silver at $14 oz. a $3 per coin premium amounts to twenty-one percent. The $3 was seen as the cost to mint the coins. A similar twenty-percent premium today would be equal to $4.30 per coin/oz.
Today, however, the coin premium stands at almost seventy percent or $15 per coin. That cannot be attributable to minting costs alone. Why, then is the premium so much higher and who benefits from it?
WHO BENEFITS FROM HIGH PREMIUMS?
Some will argue that there is a shortage of silver and the demand to own physical silver leads to higher premiums for bullion silver coins and junk silver coins. If that were the case, how come the premium for 1000 oz. bullion bars of physical silver is only 1.6 percent?
Temporary disruptions in the supply chain may affect the premium to a limited extent, as well as excessive short term increases in demand. However, they are not likely to produce the longer-lasting sizeable jumps that have occurred and continue to extract their toll on retail investors. Something like that can happen when the product is withheld or output is restricted for other reasons.
The meltdown value of a 1000 oz. bar of silver bullion is approximately equal to the spot price discounted by one percent or slightly more. This means that the U.S Mint stands to gain the largest portion of the premium charged when it releases newly-minted coins. Distributors who deal directly with the U.S. mint might also share in the spoils.
A LOW-COST ALTERNATIVE TO SILVER EAGLES
For those who might want a less costly way to stack some silver, consider silver-clad (40%) Kennedy half-dollars. They come in $1000 face-value bags, similar to the 90% U.S. silver coin bags that we referred to earlier in this article.
Let’s say that you were planning to buy a $1000 bag of the 90% junk silver coins (pre-1965). The bag contains 715 oz. of silver and the current ask price is $22,055.
Rather than that, you could buy three $1000 bags of the 40% silver Kennedy half-dollars (1965-70). Each bag contains 295 oz. of silver and costs $7150.
The total for the three 40% bags is $21,450 – more than six hundred dollars ($22,055 – $21,450 = $605) less than the the one 90% bag. The kicker is that you get 24% more silver (885 ounces vs. 715 ounces) spread over $3000 face value of legal tender.
CONCLUSION
High silver bullion coin premiums are excessive and unwarranted. Small retail investors bear the risk and it is a big one. As it stands now, an excessive premium accounts for nearly forty percent of the value of a 1 oz. Silver Eagle coin.
History shows that premiums of this kind usually don’t hold up. (see Silver Coin Premiums – Another Collapse)
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!
SILVER IS DEAD IN THE WATER…
…and cheap; it’s a bargain! Buy it now before it goes to – $500? Seriously? One thing for sure; silver is cheaper now than it was the last time we heard such exuberant (irrational?) calls for action.
In fact, the lower the silver price goes, the more fervent are the claims and projections for ever higher and seemingly ridiculous prices. After more than forty years of calls for $100 silver (see $100 Silver – Nothing Has Changed) now we are being treated to fantasy projections of $500 oz.
SILVER COIN PREMIUMS
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.
SILVER’S BAD BREAK
Bad breaks can be tough to recover from. The process can be arduous and can take a long time. Sometimes a full recovery remains elusive and distant.
Silver has a history of bad breaks over the past half-century. Below is a series of charts that tell the story…
In retrospect, nothing much has changed since I published my original article $100 Silver Has Come And Gone in October 2019.
The price is higher than it was at the time the article was written, and that is certainly positive. However, the net change since then does not alter the fundamental arguments stated in the original article. Let’s review the salient points now.
SILVER’S PRICE PERFORMANCE
Maybe silver’s price performance is not so bad. There is a case to be made that silver has met its expectations; at least relative to gold, that is.
Those who are insistent that silver has huge ground to make up in comparison to the gold price should take special note.
GOLD-SILVER RATIO
Whenever comparisons are made between gold and silver prices, some investors and analysts base expectations for higher silver prices on the fact that a return to the fixed gold to silver ratio of 16:1 is inevitable.
The argument is based on the belief that there is a fundamental justification for the ratio and that the two metals will gravitate back towards it.
In the Mint Act of 1792, the gold price was fixed at $20.67 oz. and the silver price at $1.29 oz. The official fixed prices for both metals were in effect when the creation of Federal Reserve was authorized by an act of Congress in 1913.
When gold peaked in August 2020 at $2060 oz., it marked an all-time high and nearly exact one-hundred fold increase ($2060 divided by $20.67) in price over the past century. This correlates with the ninety-nine percent loss in US dollar purchasing power over the same time period.
The price of silver in August 2020 peaked at $29.26 oz. which was not an all-time high. Also, the multiple increase in silver’s price is less than twenty-three ($29.26 divided by $1.29 = 22.68) fold compared to gold’s one-hundred fold increase.
This means that silver’s price is not keeping up with the effects of inflation. It is not even close to doing so.
In order for silver to match the one-hundred fold price increase in gold at $2060 oz., the price of silver would need to be $129 oz. ($129 divided by $1.29 = 100).
NEW GOLD-SILVER RATIO?
In March 1931 the price of silver was $.29 oz., having fallen along with other commodities over the decade of the 1920s. Silver’s price had declined seventy-five percent from its high of $1.13 oz. in June 1919.
The official price of silver was still $1.29 oz., so the amount of silver in a silver dollar was worth nearly eighty percent less than the official government price.
If we use $.29 oz. (a fully deflated price and only one penny off its all-time low of $.28 oz.) to measure silver’s price performance going forward, we find that in August 2020 at $29.26 oz. silver’s increase is now close to one-hundred fold and matches the one-hundred fold increase in gold.
Calculating a ratio for the two metals yields a considerably different result than the official 16:1 number. When we divide the gold price of $20.67 oz. by $.29 oz. for silver, the result is a ratio of 71:1, rather than 16:1.
That compares favorably with the ratio of 70:1 resulting from the calculation using the August 2020 highs for both metals ($2060 oz. divided by $29.26 oz.).
CONCLUSION
When comparing silver’s price performance to gold’s, measuring from Depression-era lows for silver is more realistic than using the $1.29 oz. fixed price.
Investors and others should reconsider any pronouncements claiming that silver is undervalued relative to gold.
If, however, you think that there is merit in calculating and relying on any gold-to-silver ratio, please keep in mind the following:
(also see Gold-Silver Ratio: Debunking The Myth and Gold And Silver – Fundamentals Be Damned)
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!
SILVER CONTINUES TO FASCINATE
After scanning some recent headlines regarding silver, I was struck by the apparent fact that proponents of silver seem almost obsessed. If not obsessed, then certainly fascinated.
At one time in my life I shared that fascination. But over the last fifty years, it has become apparent to me that the optimism regarding silver is out of proportion to its role and purpose. Unrealistic expectations for outsized price performance are not supported by fundamentals.
‘Fantasy’ fundamentals such as the gold-to-silver ratio and the gap in consumption over production are not supportable to any arguments in favor of higher silver prices.
No matter how enthusiastically the claims are made; no matter how outlandish the expectations; no matter how fervent the beliefs of investors and marketers; the silver price won’t provide its accommodation.
SILVER 55 YEARS AGO
When President Lyndon Johnson signed the Coinage Act Of 1965 into law, the price of silver was $1.29 oz. It was still only $1.30 oz. two years later, in 1967.
Suppose you had purchased silver at $1.30 oz and held it for the past fifty-five years (1966-2021). At silver’s current price of $22.50 oz. your investment would have multiplied seventeen-fold.
That works out to be an annual return rate of 5.321%. That is a pretty good average rate of return.
However, when allowing for inflation, the annual rate of return drops to 1.31%.
In inflation-adjusted terms, silver at $1.30 oz. in 1966 is the equivalent of $11.00 oz. in today’s dollars.
In other words, it took 55 years of patience and long suffering just to double your money.
IT COULD BE WORSE
The outcome above assumes you were fortunate enough to buy silver early enough and at its cheapest price. Most investors weren’t/aren’t that fortunate.
Silver’s first big blowoff came in early 1974 when its price hit $6.74 oz. Two years later, in 1976, the price had retreated to $4.00 oz.
Had you purchased silver then, and held it as a long-term investment, you would have a respectable 3.913% rate of return today.
As in our previous example, though, a respectable nominal rate of return is reduced considerably when factoring in the effects of inflation. In this case, the inflation-adjusted rate of return drops to .262%, barely more than one-quarter of one percent.
Fact: Silver at $4 oz. in 1976 is the equivalent of $20 oz. in today’s dollars.
SILVER IS A TERRIBLE LONG-TERM INVESTMENT
There is nothing in silver’s price history that supports claims for unrealistic expectations regarding its price. (see Silver Is Trapped Below $30)
In direct contrast to what some are saying, the long-term is not kind to silver investors. In fact, silver’s price history shows that the long-term works against and not in favor of silver investors. (see Silver Price – 100 Years In The Making)
Below is a chart included in a previous article (Are Silver Prices Really Cheap…) published May 2021…
In reference to the chart, I said the following: ” even on an inflation-adjusted basis most of the price history for silver is still below $20 oz.”
At the time the article was published, the spot price for silver was $28 oz. In the intervening six months the price has dropped nearly six dollars per ounce down to $22 oz.
CONCLUSION
Silver is far more likely to disappoint investors rather than reward them. Silver’s price history is indicative of that statement. Expectations for higher prices should be minimized.
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!