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It's one of the biggest mysteries in finance right now.
I mean, it's a real head-scratcher …
On one hand, demand for silver coins has been off the charts. With so many investors wanting to swap currency for silver, neither the U.S. Mint nor the Royal Canadian Mint has been able to keep up with purchase requests. In fact, the U.S. Mint actually had to suspend sales of the "Silver Eagles" just a couple of weeks into the New Year – and it still smashed the all-time monthly sales record in January by selling 7.5 million of the hugely popular coins.
And that insane demand carried over into February and March. After the first two months of 2013, the U.S. Mint had sold nearly 10.9 million American Silver Eagles (ASEs) – a third of its sales total for all of 2012. And on March 18 – the Monday that followed the weekend news about the Cyprus bank-deposit-confiscation plan – the Mint reported a stunning sales total of 638,500 of the silver coins … for just one day.
But here's the kicker. Despite this frenetic buying, spot silver prices have actually fallen since the start of the year – a conundrum that's ignited fears of a silver shortage and investor allegations of market manipulation by Wall Street.
With this scorching demand for silver coins – and reported shortages of silver-based investments – how is it possible for the metal price to be falling?
One reader, after experiencing this frustration firsthand, recently sent us this query:
For several weeks now, it has been difficult to purchase physical silver at any of the nation's coin shows, and most dealers have a very small supply – if they have any inventory at all. What little silver they can purchase, they tell me, goes out the door quickly as buyers snap it up. Yet the market price of silver remains below $29 to $30 an ounce.
Recent reports note that Russia has made a hefty purchase in excess of 25 tons of silver. Has that affected U.S. supplies? What's the overall outlook? We'd be grateful to hear your take on this. Most of the folks we ask seem baffled, too. – C.C.
Our No. 1 goal here at Private Briefing is to help you make money. Usually that's by delivering the most-profitable investment recommendations we can find.
But we also want to help make you a great investor. So when we aren't giving you straight recommendations, we're providing the research you need to make great money-making decisions.
To that end, I wanted to give you an insider's view of the silver market. So I contacted Rich Checkan at Asset Strategies International (ASI), a precious-metals and foreign-exchange dealer that operates out of Rockville, MD – just down the highway from our own offices here in Baltimore.
Because ASI is a longtime veteran of the precious-metals business – it recently celebrated its 30th anniversary – I was certain that Rich and his staffers could offer you insights you might not find elsewhere.
Here's an excerpt of my interview with ASI.
Patalon (Q): Rich, we've all seen the headlines – demand for silver products is soaring, but prices are dropping. And, as you see from some of the e-mail excerpts that I've shared (with reader names withheld, of course), some of our subscribers say they're having a tough time buying silver coins and bullion of late – as if there's a real shortage unfolding. This has ignited all sorts of conspiracy theories, and a lot of worry, too. I was interested to hear you say that you all have experienced some of what I've described firsthand. So let me start by asking: What have you been seeing?
Rich Checkan (A): These are great observations, and great questions, Bill. And they're the same questions that quite a few investors are asking right now. When the spot price of silver is drifting down – but the premiums for bullion coins and bars are moving higher … and delivery times are taking longer – the situations your readers describe just don't seem to make sense.
And, of course, this disparity ignites the conspiracy theories, the knee-jerk reactions – and the belief that something has to be amiss.
(Q): What's behind this situation? In other words, what's the catalyst? Is there a shortage? Have you ever seen this before?
Rich Checkan (A): There are two things at play here that are affecting the silver market – and neither one is new. In fact, veteran silver investors will no doubt recall that we saw the exact same situation back in 2008.
But the two factors, or "catalysts," as you referred to them, most definitely warrant a look. One affects coins and bars. The other affects the very popular "junk" silver – that is, U.S. 90% silver coins minted before 1965. Here's what's going on in each situation …
And let's start with coins and bars … as most investors know, coins and bars are minted both by private and government mints. When these mints were initially built, they were constructed to sustain a finite capacity … you know, to mint a set amount of "product" (coins and bars) during a given period of time.
The capacity was more than adequate when these facilities were built. As you might guess, they weren't constructed to operate at a level of peak demand that you might only experience 5% of the time. Instead, these minting operations were built with the capacity to service the demand levels that you see 95% of the time. So when demand spikes (as a result of uncertainty in the financial markets, or in the economy in general), these operations aren't able to produce coins and bars fast enough to meet this big surge.
(Q): You know, I've seen it stated that the U.S. Mint can't handle demand for more than about six million coins in a month. So when these popular forms of silver become unavailable, is there a ripple effect on the rest of the market?
Rich Checkan (A): That's correct. As the more popular forms of bars and coins are depleted by this spike in buying activity, the lesser-demanded products are purchased as substitutes – meaning their supply dwindles, as well. This cascading, or ripple effect, is what we're seeing right now.
The bottom line here: This isn't about a shortage of silver … it's all about a shortage of the fabricated forms of silver that investors most like to purchase.
(Q): Given what you've just described, I'm guessing that we're looking at a different scenario for "junk" silver.
Rich Checkan (A): That's exactly right, Bill – the junk silver situation is different. These are coins minted in 1964 and before. So by their very definition, they aren't being made anymore … there you're talking about a true scarcity situation.
The junk silver that is out there is basically all in the hands of private investors. For "new" investors to be able to buy, those private investors must sell this already-existing junk silver into the secondary market. And this typically only happens:
- When the market is rising, and we hit the higher price of silver at which these private investors are willing to sell at a profit.
- Or when the market falls precipitously, and causes panic selling by investors who are fearful that they might get left holding the bag … of junk silver.
Remember, now, we've been stuck in a trading range for about a year and a half. Those junk-silver owners looking to sell at these price levels have already done so. As a result, there is very little in the way of "new" product coming into the secondary market for potential new buyers to acquire.
Once again, we're not talking about a shortage of silver, per se … instead, it's a current – momentary – shortage of a popular, minted form of silver. And this product was minted long ago.
(Q): Now that we have a better understanding of just what's happening here, how long do you see these "shortages" persisting? What will cause them to end … change … and how or why will that change take place?
Rich Checkan (A): In the case of bars and coins, as soon as the private and governmental mints can catch up with demand, or as soon as that demand subsides to more typical levels, we'll see a reversion to normalcy in the premiums and delivery times.
But I am not projecting that demand will subside anytime soon. So it's really a question of how quickly the mints can ramp up. Remember, the physical production plants can only generate a finite capacity. But adding extra shifts and perhaps altering the product "mix" can provide a slight boost to production as those mints play catch-up.
In the case of junk silver, I believe the only answer is for us to break out of the trading range that silver prices have been locked into. In other words, we either need to see silver fall below $25 an ounce, or rise above $40 an ounce. Once either of those occurs, we'll see new junk silver flow into the secondary market.
(Q): So now that we understand the forces that are at play, let's talk about prices. It sounds like what you're saying is that the prices on silver products may increase, but not the prices on silver itself. How are these factors affecting prices of the different forms of silver?
Rich Checkan (A): Strong demand for scarce items leads to higher prices. Not surprisingly, the premiums on all minted silver products are moving up. If my wholesalers pay more to obtain a certain product, they charge me more to buy it for you … the end customer/investor. That means the client covers the increases with higher premiums.
(Q): Given what you've told me here, what would you tell individual investors seeking to buy silver to do?
Rich Checkan (A): My answer is based on a strong belief that the situation I'm describing – the currently low spot-silver prices … and the factors behind them – represents an excellent opportunity to pick up some cheap silver. Let me explain why …
If you look at the charts for gold and silver prices from Dec. 1 on, you'll see that it looks like a double-diamond downhill ski trail. And that pattern has investors asking themselves: "Is this the end of a 13-year bull market in precious metals? Or is it the prelude to the next leg up in an extended precious metals bull market in which there's still room to run?"
In my opinion, it's the latter … the prelude to the next "leg up." I say that because I believe the 13-year bull market in precious metals has little or nothing to do with the supply-and-demand fundamentals. Instead, I believe it has everything to do with the weakening of our fiscally managed U.S. dollar.
Zero interest rates – the result of the U.S. Federal Reserve's "zero-interest-rate policy," or "ZIRP" – means zero opportunity cost to holding precious metals versus keeping cash in the bank. QE1 through "QE4-ever" – another Fed manifestation – ensures the loss of purchasing power of the dollars with which we measure gold, silver, platinum, palladium and other commodities. And the political gridlock in D.C. tells me there is no solution forthcoming anytime soon.
Putting that all together allows me to see another leg up in this extended bull market. If you see it the same way, you should look for ways to own it here … at bargain prices.
(Q): A lot of our readers really like "junk" silver. Given what you've described, do you like it here?
Rich Checkan (A): I do, Bill. I still like junk silver at current higher premiums. But there are other ways to own silver cost-effectively until premium normalcy is restored.
(Q): Could you run through several for our readers?
Rich Checkan (A): Absolutely. Here are two in particular.
First, Perth Mint Certificates of Pooled/Allocated Silver Bullion … 2.25% above the spot "ask" price for silver, plus 10 cents per ounce to partially offset the fabrication costs. This is stored in the Perth Mint in Western Australia. So you have an ongoing 0.95% annual storage fee to keep it there … 100% physically backed metal … 100% fully insured at current market values.
Second, check out Buffalo Rounds. This is an extremely cost-effective, liquid form of silver … currently 7% over the spot "ask" for orders of 100, or 5% over spot "ask" for orders of 500.
Of course, prices are subject to change … based upon market fluctuations and availability.
(Q): Rich, you mentioned "storage." That's a topic we get lots of questions about. Essentially, individuals can choose to store their silver with someone else (a company that specializes in this kind of thing) or store it at home. I know there are arguments for and against both options. What advice would you offer on that point? With each option, what should investors keep in mind?
Rich Checkan (A): Storing the metals yourself is the cheapest option available to an investor … that is, until the coins or bullion are lost or even stolen. Then it instantly turns into the most expensive option. That being said, self-storage is how most investors start out. After all, if they buy precious metals for the key reason we believe they should, they are buying it as a form of "wealth insurance" – a store of purchasing power. That protection comes in a liquid form (meaning it's easy to sell), can be kept close at hand, and is insurance against a financial emergency that they hope never comes.
If you have a financial emergency of that type, you need your precious metals close enough at hand to be able to sell them immediately to meet the crisis.
However, once you have enough precious metals close at hand … enough to meet any crisis … you'll find that you've approached a "threshold" of sorts. Once you cross that threshold, you have more on hand than you believe you'll need and, in fact, probably have more on hand than you're really comfortable storing yourself.
Once you've reached that point – and you really need to plan ahead for this – it's time to start diversifying your precious-metals holdings … in different products and in different physical locations – both domestically and abroad. The good news is that there are a whole host of products that make the diversification process safe, simple and very cost-effective. We offer our clients an array of products, as well as an array of storage options.
(Q): We've covered a lot of ground here today. Can I ask you to offer a summary – you know, to reiterate the key points you've made here?
Rich Checkan (A): Absolutely. To sum up … the current situation in silver is nothing new. It is a temporary shortage of physical product – but not a shortage of silver itself. That's an important distinction. And even though the most popular forms of silver are experiencing higher premiums and extended delivery times, there are still a number of viable options available to the prospective silver buyer.
Obviously, there are no guarantees here. But it's our belief that there will be another leg up in this 13-year (and counting) precious-metals bull market.
[Editor's Note: Our thanks to Rich Checkan at Asset Strategies International for taking the time to talk with us. Today's Private Briefing was prompted by a reader query. This underscores just how much we value your suggestions and questions. We often base our reports and research on the questions or concerns that a lot of you seem to have. Let us know what's on your mind. Drop us a line at PrivateBriefing@MoneyMorning.com.]