(Clint Siegner, Money Metals News Service) The unfortunate truth is that it is possible for bullion investors to lose money in an up market. Some buyers are learning that lesson now, and it is worth sharing.
Those who understand how these markets work can make better decisions about what to buy and when. They might even take advantage of the bullion market idiosyncrasies to magnify gains.
At Money Metals, we go to great lengths to educate the public about this topic. However, not everyone has seen or taken our advice.
An example: One of our clients was among the waves of investors buying coins, rounds, and bars in 2021. They ignored our warnings to stick with low-premium bars and rounds – and instead chose to purchase silver American Eagles which were in very short supply at the time.
Premiums for that coin – the amount bullion dealers charge above the silver market price – were at unprecedented highs due to inventory shortages.
It was the result of a potent combination of factors. Eagles were the most popular silver product any bullion dealer sold. The market was flooded with buyers while sellers had vanished.
U.S. Mint Incompetence Causes Erratic Premium Swings
And Eagles are produced by the inept U.S. Mint, an absolutely incompetent organization which actually dramatically shrank production despite overwhelming demand!
Money Metals had been loudly encouraging clients to avoid paying the inflated premiums and turning to other items. We regularly published warnings about Eagles being significantly overpriced. However, there has always been a strong impulse among buyers to stick with official U.S. Mint coins.
The silver market price at the time was $25.20/oz. The premium was a whopping $14/oz. So our client paid more than $39 for each 1 oz coin. (Other dealers were charging even more.)
Last week, when the client called to discuss selling, he discovered the premiums had collapsed. There are plenty of sellers now, and the sky-high premiums in recent years have come way down.
The silver price had risen to $33.50, but the total bid price, including the bid premium, for his Eagles was about $34/ea. The client is currently underwater by roughly $5/coin despite silver being $8 higher.
Avoid High Premium Items and Focus on the “Melt Value”
The first thing to understand about bullion investing is that the metal you buy has TWO components. There are essentially two independent markets driving bullion prices and they don’t necessarily move in the same direction.
The first component is the market price, or “spot” price for the metal, and it is set in the futures markets. This is the price talked about in the media and it is what most people focus on.
The other component is the premium mentioned above. This is a price gold and silver dealers add to the market price to determine the total price for any retail bullion product.
When it comes to premiums, the manufacturing capacity of mints and refiners who produce coins, rounds, and retail-size bars matters a great deal. So does the volume of buying and selling amongst bullion investors.
In other words, mine output and the availability of large COMEX deliverable bars haven’t been much of a factor in premiums – at least up to this point. It’s all about supply and demand in retail coins, rounds, and bars.
The mine output of raw silver and the availability of COMEX deliverable bars is, however, a big factor when it comes to the spot price of the metal – at least in theory.
Supply and demand fundamentals (or lack thereof) in COMEX price discovery are the subject of much consternation and we won’t get into that here.
Premiums vary for each product, while the spot price will be used for all products as the base price.
Supply & Demand, Manufacturing Costs Drive Premiums
We’ve already covered the capacity of mints and refiners to provide supply as well as the contribution of retail investors when it comes to both supply and demand.
Manufacturing cost is another factor in premiums.
From a manufacturing standpoint, it is less costly to produce a single 100 oz bar than it is to mint 100 one-ounce coins, so the bar will have a lower premium. Most dealers offer a discounted premium for buying in larger quantities, etc.
Finally, it is important to understand there are both bid and ask premiums, depending on whether an investor is selling or buying. The price difference between the two is how bullion dealers make a living. They buy metal using a lower bid premium and sell it using a higher ask.
The differential between bid and ask premiums, referred to as the spread, will widen in unbalanced markets where demand dramatically outstrips supply or vice versa.
LESSON: Silver Is Silver, and Gold Is Gold
So what are the lessons for bullion investors? Bullion prices are more complicated than many expect when they get into this market, but investors can still apply one basic rule for success; focus on low premiums.
Investors can pretty much never go wrong buying at the lowest available price. That means focusing on rounds and bars and avoiding government-issued coins with a hefty upcharge.
Rare coins are the ultimate example of how to lose money in an up market – especially if you do business with those shady coin companies advertising on television with celebrity spokesmen.
Paying more than a couple dollars extra for a silver Eagle is bad, but paying 2-3 times what the metal content is worth for some dubious collectible coin will turn out much worse for anyone who does not know what they are doing.
Try to time purchases when premiums are low. Now is a good time to buy because there is plenty of silver with premiums below about $2.50/oz and gold below $100/oz.
Investors who prefer buying coins can get away with paying a little extra, as coins will bring some extra premium when it is time to sell.
When the price difference between a Silver Eagle and a silver round is $2, the buyer can be confident. When it is $10, the buyer should heed Money Metals’ advice and choose another product.
When It Comes to Premiums, Product Selection Is Important
Some savvy investors took advantage of the huge premiums in retail bullion in 2020 – 2023. 90% silver U.S. coinage is one of the better products for speculating on premiums. Supply is 100% dependent on the number of people selling it as the U.S. Mint stopped production 60 years ago.
We had clients who accumulated this product at ask premiums under $1/oz. When demand exploded, 90% silver premiums were among the first to spike. Bid premiums went as high as $8/oz.
It was possible for them to exchange for silver bars and significantly increase their number of ounces owned.
Here is one final suggestion for investors who would rather not bother watching the retail markets or trying to evaluate premiums. Money Metals offers VaultSecure Gold and VaultSecure Silver.
These allocated storage options were created at the beginning of the buying frenzy in 2020 and designed to end-run shortages and premium spikes in retail bullion products.
Clint Siegner is a Director at Money Metals Exchange, a precious metals dealer recently named “Best in the USA” by an independent global ratings group. A graduate of Linfield College in Oregon, Siegner puts his experience in business management along with his passion for personal liberty, limited government, and honest money into the development of Money Metals’ brand and reach. This includes writing extensively on the bullion markets and their intersection with policy and world affairs.
