By Franklin Sanders
Behold, Silver Bugs, the Promised Land!
Investors are piling into silver, at last having discovered silver’s astounding bull market future, and silver soars daily. Adding fuel to the fire, the Internet is flaming with a campaign to catch JP Morgan short silver.
With silver pistol in hand, they are, however, blasting away at their own toes.
What? What? How can you go wrong buying silver?
Very simple: you can pay too much.
The Short Squeeze
If there is a massive short on the market, just like 1980’s short squeeze, it is a squeeze for deliverable silver. That means bars of 1,000 ounces, plus or minus 5%, of 99.5% purity.
Thousand troy ounce bars are hardly what most physical silver investors want to store in the freezer. The size of a shoe box, they weigh 68-1/2 lb. Every chiropractor dreams you will buy and attempt to move them.
So what are investors buying? New to the silver market and not very sophisticated, they buy 99.9% pure hundred ounce bullion bars or silver rounds. Even if they were trying to take pressure off of silver shorts, they couldn’t do them a bigger favor.
How’s that?
Taking Pressure Off The Shorts
Simple. They are pushing scrap silver into the refinery pipeline. By buying only 99.9% fine products, they are encouraging dealers to sell off US 90% silver coin to refineries, so that the refineries can produce more deliverable silver to alleviate the shortage. This hardly counts as denying ammunition to your enemies.
Think about it: silver has been skyrocketing for months. That always draws huge amounts of scrap silver into a very small bore pipeline with chronicly low pressure. The pipeline is refinery capacity, which is very small. The pressure is the financing that pushes silver through the pipeline, and that financing is chronicly very thin and small.
Right now, refineries are backed up 60 to 75 days. That means that wholesalers who send scrap – 90% coin, 40% coin, sterling silver, photographic scrap, jewelry – to be refined must wait 2-1/2 months to be paid, and tie up money in that scrap in the meantime.
Face it: Silver is a tiny market, and it takes very little increased throughput to clog the pipeline and exhaust that thin financing.
Why Not Buy Silver Under Spot?
What’s the result? Large wholesalers have simply pulled their bids (offer) for 90% silver coin. Now wholesalers are bidding 100 cents under spot for US 90% silver coin and will buy only limited amounts, while they are selling 90% coin at 58 cents below spot. That means that 90% silver coin is far and away the cheapest way to buy silver right now, and ridiculously, unhistorically cheap.
Presently (as of 15 December 2010) retail customers can buy US 90% silver coin at 43 cents per fine ounce over spot to 15 cents an ounce under spot, depending on quantity and retail commission.
Of course that’s crazy. Even crazier is people lining up to buy hundred ounce bars or one ounce rounds and paying $1.70 an ounce to 95c an ounce over spot, or $1.85 an ounce to $1.10 an ounce over. I won’t even mention the folly of buying silver American Eagles, stuffing money into the US Mint’s pocket, an agency of the same government so many people suspect has long been suppressing the silver price, let alone paying $3.46 an ounce to $2.83 an ounce for the privilege of being officially snookered.
The Axiom of Premiums
What blows an even bigger hole in the investor’s? Over time, premium always disappears in a bull market. When the silver market peaks and a mere 16 ounces of silver will buy one ounce of gold, only ounces will count. Nobody will care what kind of ounces you hold, only how many. Every form of silver: silver dollars, silver American Eagles, one ounce rounds, ten ounce bars, 100 ounce bars, all of it will trade at the same price per ounce. I know, because I saw it happen at the 1980 peak.
Oh, there’s also a kicker with 90% silver dimes, quarters, and halves. When folks are desperate for something that might function as money in a crisis (Y2K, the fall 2008 panic, hyperinflation), they don’t buy 100 ounce bars. They buy US 90% coin because an ounce of silver in that form offers fourteen silver dimes or fourteen separate tiny transactions, not one huge one. So during the panic in fall 2008, the premium on 90% shot up to forty percent over its melt value. Face it: under those circumstances the 90% coin is simply a more divisible & liquid form of silver. (Footnote: $140.00 face value US 90% silver dimes, quarters, or halves contains 100 ounces of pure silver. One dollar face value – ten dimes, four quarters, or two halves – contains 0.715 troy ounce of fine silver.)
Why Shoot Yourself in The Foot?
Does it make any sense at all for silver investors to buy bullion products at huge premiums over silver content while they pass by the much more economical & useful silver coin? Does it make sense for them to force that coin into the refinery pipeline, and ease the pressure on silver shorts?
Well, not to me, but then, I don’t buy $300 cigars or Bentleys, either.
For over 30 years Franklin Sanders has been writing The Moneychanger, a gold and silver newsletter, and trading in physical silver and gold. You can sign up for his daily commentary on metals’ markets, complete with physical gold and silver wholesale prices not available anywhere else, by visiting www.the-moneychanger.com. Look for the yellow banner that reads, “Download your free portfolio calculator and get free price reports daily.” Email him at franklin@the-moneychanger.com.”