Special Report: Though it's Called "Junk Silver," the Profits Aren't Trash

[Editor's Note: A sizeable number of Money Morning readers responded to our recent articles on silver, rightly pointing to "junk silver" coins as a viable silver investment. The article that follows is an introduction to junk-silver investing. Given that silver yesterday hit its highest price level in 30 years - and that prices are expected to head even higher - the timing couldn't be better.]

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Despite its name, junk silver is not junk.

Indeed, the term "junk silver" is actually a misnomer, since this form of silver investing has provided excellent returns over the past decade. Junk silver consists of U.S. quarters, dimes, and half-dollars minted before 1965, since coins struck before that time contain 90% silver and 10% copper.

But junk silver's real attraction is that it offers investors the best of both the two possible investing extremes that seem to be attainable right now:

  • First and foremost, during intense bull markets in silver – like the one we're experiencing right now – junk silver tends to outshine (and outperform) silver bullion.
  • But if some of investors' darkest fears are realized, and the U.S. government's overenthusiastic printing of money were to transform the greenback into so much worthless paper, then 90% of U.S. silver coins would be used for the purpose they were originally minted – as money that can be spent.

Let's take a closer look.


Junk Silver Basics

The term junk silver was adopted because the coins being referenced typically have no collectible value. Instead, junk-silver coins are valued for the bullion value of the silver that they contain. Here in the United States, the most commonly collected junk-silver coins are the Mercury and Roosevelt dimes, Washington quarters, and the Franklin and Kennedy half dollars that were minted in or before 1964. That's because these coins have a 90% silver composition that's known as "coin silver."

There are six solid reasons to make junk silver part of your portfolio. In short, junk silver:

  • Is a finite commodity.
  • Is no longer being produced (the scarcity factor).
  • Is a product (currency coins) that is easily recognizable.
  • Is divisible, meaning you're able to use small amounts to pay for something.
  • Requires no assaying.
  • Was produced by the U.S. government, meaning everyone recognizes what you've got, so you don't need to run any tests to prove its value.
  • And is utilitarian, meaning you could actually put change into a payphone (remember those?) or a vending machine to purchase a product or service.

Kevin Drost, preferred client relations manager at Asset Strategies International Inc., says many of his company's clients feel there's a seventh reason to own junk silver that's no less important than the afore-mentioned six: Since it was produced by the government itself – and is "legal tender" – it can't be confiscated.

The Mathematics of Junk Silver

Junk silver is sold in bags of either $100 face value or $1,000 face value. Typically, the $100 face value bags contain 1,000 dimes, or 400 quarters, or 200 half-dollars (the coin denominations are usually not mixed).

An Introduction to 'Junk Silver'
Since these coins were in circulation for decades, wear and tear means they no longer contain 90% silver. In fact, they typically contain about 71.5 ounces of silver. So at recent prices of roughly $20 an ounce, $100 face value bags run about $1,530, which includes a 7% premium to the spot price of silver (On the smaller bags, that's the average premium you should expect to pay. The $1,000 face value bags, of course, contain 10 times the number of coins as the $100 face value bags, with a small pricing advantage of 5% premium over spot silver prices.)

Silver hit a low of $4.06 per ounce back in November 2001. Since then, the returns of the "white metal" have been extremely rewarding for those early – and patient – investors. The returns for silver have certainly been better than those for U.S. stocks.
Indeed, the Standard & Poor's 500 Index – the closely watched barometer of the U.S. stock market – has returned a big, fat "0" for that same period, having been essentially flat after nearly nine years.

Silver, on the other hand, has trounced the broader markets. Over that same span of time, silver has clocked a handsome gain of 429%.

It's true that silver is known to exhibit considerable price volatility. But, as these returns show, that's been mostly to the upside.

So the investor who'd have purchased a $100 face value bag of junk silver some nine years ago would have paid about $312. Today, that same bag is worth $1,650, or five times the original outlay.
Don't dismiss all this talk of junk-silver gains as just a lot of investing trash talk – with the U.S. government printing presses continuing to run overtime to fund its ongoing debt binge, investor interest in precious metals is only going to escalate.

And that means silver prices will head higher from here.

Just yesterday (Monday), for instance, silver futures for December delivery rose 7.2 cents an ounce, or 0.30%, to close at $21.471 an ounce on the Comex. Earlier in the day, silver futures hit $21.645 an ounce – the highest price for a most-active contract since October 1980, Bloomberg News reported.

And there's more to come. In fact, the smallest commodity moves since 1996 are signaling that there's a big move to come in precious metals in the fourth quarter of this year, according to a survey released yesterday.

The Standard & Poor's GSCI Index of 24 raw materials, tracked by as much as $80 billion worth of investments, had advanced only 1.6% so far this year (through Sept. 24) – the smallest advance in 14 years, Bloomberg reported yesterday.

Slumping oil and natural gas prices, the result of slowing growth in the United States and China, wiped out soaring copper prices and a record run-up in gold.

The Bloomberg survey of 24 analysts projected that copper, cocoa, coffee, sugar and soybeans will fall by Dec. 31, while cotton will rise. Corn, wheat and nickel may be little changed. Precious metals will gain through the end of the year – with silver reaching $22 an ounce.

The surge in silver won't end there, either. According to a recent Money Morning forecast, silver could reach $50 an ounce by the 2012 presidential election – a gain of 133% from here.

It's worth noting that Money Morning predicted the current breakout in silver.

Where to Look

If you decide that junk silver needs to be part of your portfolio, make sure you buy from a reputable dealer. This is probably the single most important aspect of buying junk silver. Make sure to do your homework and check them out first.

The list that follows is by no means all-inclusive. But some of the dealers that have established reputations include:

Action to Take: It's called "junk silver," but it's anything but junk. Instead, junk silver is an investing venue that provides investors with all the important advantages of a precious-metals bullion investment while at the same time still featuring the utility of a metals-based currency whose value is widely understood.

As such, junk silver should be part of an investor's precious-metals investing program. Before you make a move, however – do your homework. Explore your needs. And find a dealer who can fulfill your requirements.

Silver is going to continue its run. Make sure you're aboard to profit.

[Editor's Note: Peter Krauth, a frequent contributor to Money Morning, is the editor of the Global Resource Alert, a private advisory service that focuses on precious metals, energy commodities and other natural-resource-related topics. Krauth spent two decades as a market analyst and portfolio advisor, and has covered all the commodities sectors, including gold, silver, coal, alternative energy and agriculture. He even makes his home in Canada - to be closer to the action. And several of his recent predictions have generated a genuine Internet buzz.

To find out more about commodities, or the Global Resource Alert, please click here.]

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About the Author

Peter Krauth is the Resource Specialist for Money Map Press and has contributed some of the most popular and highly regarded investing articles on Money Morning. Peter is headquartered in resource-rich Canada, but he travels around the world to dig up the very best profit opportunity, whether it's in gold, silver, oil, coal, or even potash.

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  1. Rick | September 28, 2010

    Your article talks about buying silver. What is the best way to sell junk silver so that one does not get hosed?

  2. Bruce | September 28, 2010

    The second paragraph under "The Mathematics of Junk Silver" needs a little tweaking.

    The coins will contain 90% silver, no matter how much wear and tear they have. The weight of the bag will go down due to loss of metal from the coins.
    You probably need to point out that it's the $100 face value bag that ends up averaging about 71.5 troy ounces of silver.
    It might be a nice addition to state how many tr oz of silver is contained in a bag of new coins.
    Another would be to state what the TOTAL weight of the average bag of junk silver should be.

  3. mark joseph | September 28, 2010

    There is a last reason that was not mentioned, maybe for good reason, that junk silver is inviting.

    Because junk is made up of coins it is technically a collectible and the dealer does not have to report the price you bought it for to the feds. It is up to you to report your buy price to IRS if you sell it. In other words it is between you and your conscience to establish the capital gain number.

    This is not true with bullion. The dealer files that with the feds. Some are trying to change this but for now this is the way it is.

  4. Jim Pavlakos | September 28, 2010

    History has shown us that when silver rises quickly the price paid for 90% coinage is highly discounted due to more coming on the market than investors buy and the only thing left to do with it is to refine it, hence the large discounts. That is why I think .999 fine silver is a better item to own. You can own pure silver that is easily recognized and if you buy 1oz silver rounds you have your silver in nice increments that at 21.50 spot silver can be bought for less than 4 % over spot delivered and insured. At Golden State Mint we even have fractional silver ( half, quarter and tenth oz.). Pure silver almost always brings more money than junk silver when you sell it and costs less most of the time to buy too.

    90% bags are said to have 715 oz of pure silver in them, even though I have found that highly worn bags tend to have more like 712 oz's in them when refined. A $1,000 bag weighs about 794 Troy ounces which equates to about 54.5 pounds avdp. There are 14.583 Troy ounces in a pound that we use in every day use. Precious metals are measured in Troy ounces which weigh more than the 16 ounces we are normally familiar with per pound.

  5. Jim Pavlakos | September 28, 2010

    A dealer makes no distinction as to buying pure silver or junk silver. There are no more reporting requirements for silver or gold in any form than if you were a grocery store or a tanning salon as far as IRS requirements go. Many people think that there are reporting requirements that are different than junk silver but it is simply not true.

  6. Silence Doogood | September 29, 2010

    There once was a time when the best deal in any town was Junk Silver. These days there isn't much difference (price wise) to make junk silver appealing and forget about trying to get back anywhere near what you pay for it. I walked into a local coin shop one day and watched this guy who was obviously desperate to get rid of his pre 65 Roosevelt dimes. This was when silver was $17 & change per oz. The shop bought his rolls of dimes for $37.00 per roll. I was inside the shop while the deal took place at the window. It was busy in the shop and when I finally got to a person that was able to help me I asked what their price was for a te rolls of Roosevelt dimes. He pulled out his calculator and for ten rolls of pre 65 Roosevelt dimes the shop wanted $550.00 (they do not charge tax. So had I bought the ten rolls the store would have made $18.00 per roll. Sell price $55.00. buy price $37.00. I stuck with blemished silver eagles at $1.00 above spot….. I don't care if silver is dull / off color….. As long as it's silver and the price is right, I'll buy it…. Unfortunately the junk just wasn't very appealing. I understand back in 1980 when silver peaked at $54…… junk was being bought at half the price. I do have junk and I believe it will come in handy when the dollar takes a complete CRAP and trading ( the way it is currently going on in L.A. and some southern states in grocery stores)…. All silver Eagles and Maples & bars will be, if needed, be used if absolutely necessary for larger items however, I plan on holding it as long as it takes for the actual TRUE silver price to be recognized which is after jp and co. is busted for all the crimes of manipulation of silver to the downside & above ground rarity is observed by it's demand and it's unbelievable ratio to gold all factored in with inflationary prices….. Oh, I can wait. As the world turns and the dollar is no longer recognized as the world reserve currency I believe the nations that have waited for so long will see to it that Ag. is King for as long as it takes to return to gold silver as REAL MONEY as written in article I section 10 of our Constitution. It's a shame that what we once called 3rd world countries will soon teach the U.S. what REAL MONEY was and still is!!!!

  7. Don Honey | September 29, 2010

    sign me up for the free recession buster 1 year, thanks

  8. Jim | September 29, 2010

    Iv'e been asking multiple people about the troy weight systom and Iv'e gotten different answers that have me still a bit confused about the weight.
    The most common answer for si;lver bullion weight is 12 troy ounces per lb.,But then they say we usually don't go by pounds just oz.'s,the part that confuses me is were does the 14.583 come from in troy vs. the 12 oz. ??????? TIA jIM

  9. fallingman | September 30, 2010

    I appreciate your following up on the suggestion by me and a couple of others to talk about junk silver. Very helpful to many, I'm sure.

    One note: The bid/asked spread for junk is fairly tight. You normally have to pay a slight premium over spot and, somewhat counterintuitively, the premium tends to erode (sometimes to 0) when silver is rising (and sellers show up to take advantage) and increase markedly when the price has fallen and everyone wants in. I think it went to something like 50% during the JPMorgan-orchestrated collapse in 2008. The bottom line is that you likely won't lose as much (vs. spot) as you think when silver is going down and you won't make quite as much as you think when silver is going up.

    You won't get hosed on junk if you find reputable dealer, but there are many companies that prey on the ignorant and sell at inflated premia. Be careful. Don't be a victim…or else they'll go and create a Federal junk silver buyers protection agency.

  10. nigel kennedy | May 2, 2011

    where can we buy junk silver in England anyone know ?

  11. Joe Silverheels | July 18, 2013

    The article is a bit dated, but the fundamentals remain. Thanks for the thorough run through on junk silver. Here's a question I've been hit with: Where do the bags of junk silverjunk come from? There's got to be some entity that collects the coins, and bags them. Is it the US Mint?

    Joe

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