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Thursday, November 20, 2014

Precious Metals Conundrum

Interesting goings-on with gold, silver and platinum right now.

We saw spot prices drop big-time a couple of weeks ago after Japan said they were going to "kick it up a notch" with their flavor of Quantitative Easing.  It just so happened - entirely by coincidence, I'm sure - their announcement coincided with the Fed's notice that they were going to stop QE.

The result was an artificially stronger dollar (when compared to other world currencies), which resulted in lower precious metals prices.

Then the rush happened.

In my PM store, we essentially have no silver.  Both the US Mint and the Royal Canadian Mint have announced they're out of silver, and won't be producing any coinage for the rest of the year.  The major private mints are in the same predicament.  The only stuff available is that which is already in the pipeline.  And it ain't much.

My primary wholesale dealer has posted delivery dates of private mint silver going out into January 2015! 
If someone comes in to sell some, it's gone inside a matter of hours, usually sooner.  I've literally had customers queued up waiting to buy what the guy in front of them doesn't buy.

Gold sales are similar, but not quite as frantic.  Yet.

Since these spot price drops are a result of paper markets and not physical markets, the premiums on silver, in particular, have soared.  For the first time in the past 5 years (maybe ever), the premium per ounce on good old "junk silver" (Pre-1965 90% silver US coins) is higher than the premium on silver rounds.

Supply and demand, baby!  Unreal.

So, is now the time to buy?  That's really a tough one to answer.

The EU has announced that they are going to take another swing at the whole QE shell game.  If they do this, we'll see a drop in spot prices again, just like we saw with the Japanese QE.  The rub is, there still isn't any silver to buy!  The product that is available will have a migraine-inducing premium.

On top of all of this, a number of silver and gold mining companies have made rumblings of shutting down some of their mines.  At these spot prices, they lose money on every ounce produced.  Not a sound business plan.  So they'll wait out this paper vs physical war by idling production.

For me personally, I'm still buying gold and silver (when I can get it) - just like I do every month.  My gut says that we will see further lowering of spot prices because of the QE nonsense - how low, I don't know - but the lower spot prices will be temporary in nature. 

How temporary?  Again, I don't know.  I continue to believe that the spot price manipulation will eventually collapse under its own weight, and market economics will return to play.

When you have 92+ paper contracts for every 1 ounce of physical silver, you need less than 1% of the contract holders to demand physical delivery - as is their right - and the whole thing blows up.

Maybe that happens tomorrow, maybe next quarter, maybe in 5 years.  The folks in the Market Manipulation Syndicate (TM) have a vested interest in keeping commodity prices low.  And they have a whole lot of power and money behind them.

But economics always prevail.  Eventually.

If you're going to jump into the PM pool:

  • Don't go into debt to obtain PMs.  Bad economic choices lead to bad economic outcomes.

  • Understand that your PMs may lose "value" in the short run.  If you can't mentally bury the PMs in your backyard, don't buy them.  PMs are not a "get rich quick" investment.  They're a long-haul deal.

  • Have your bills paid, your cash emergency reserves funded, and some cushion for other unexpected events.

  • Get educated.  Understand what you're buying, and how to eventually sell it.

  • Go slowly, set a budget, and stick to it.  PLEASE don't go, "all in" with your first purchase.  That's a bad investment strategy, whether it be stocks, bonds or PMs.

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Copyright 2014 Bison Risk Management Associates. All rights reserved. Please note that in addition to owning Bison Risk Management, Chief Instructor is also a partner in a precious metals business. You are encouraged to repost this information so long as it is credited to Bison Risk Management Associates.


Anonymous said...

I bought few more Oz. and got free shipping via APMEX. Premiums are getting higher but you can still buy silver bullion coins and bars for under $20.00 per oz. Getting physical silver is getting a bit more expensive but it is doable if you shop around.
I'm not looking at silver as an investment as much as I'm looking for a bit of inflation/fiat currency insurance. I have junk silver for barter and I hope my bullion will pay off home or buy land if the economy tanks. Food water,heat security are good to go, so why not Dollar cost average a bit of PMs. With the traditional ratio of 15/1 of gold vs. silver and gold is $1200 per oz. Silver should cost about $80.00 per oz. So anthing in the $20.00-$30.00 makes silver a bargain!

Ryan said...

When silver kept slipping down in price I bought $10 face in 90% from my chosen dealer. He seemed to have all the normal stuff in stock. I'm not sure how the % of the price that was premium is compared to the past but it seemed reasonable.

Chief Instructor said...

myadventures: I too, am mostly buying silver as opposed to gold. The ratio right now is north of 70x, which is just insane

If you must buy online, APMEX is one of the very best and trustworthy companies I can recommend. Our store actually uses them when we sell excess bullion (which hasn't happened in a LONG time now!).

That being said, if at all possible, try to pay cash at a local coin shop or bullion dealer. There is then no record of what you bought. Every credit and debit purchase made to any mid- to large-sized online dealer is reported to the IRS.

TOR: To determine your premium-over-spot, take your price per dollar face, and DIVIDE by 0.715 (the ounces of silver per dollar face). Then subtract the spot price per ounce, and you'll see your premium.

For instance, on APMEX, they're selling junk silver for $14.65 per dollar face. Divide that by 0.715 gives you $20.49. Subtract spot (which is $16.40 at this second) and you get a premium of $4.09 per ounce.

Normally, junk silver runs about $2.50 over spot.