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.]

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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