Eagles not best way to own silver

Posted on December 18, 2014 by Pat Heller

The U.S. Mint charges $2 above the spot price when it sells regular silver American Eagle one-ounce coins to its handful of Authorized Purchasers. These APs are then responsible for the costs and logistics of picking up the coins at the West Point or San Francisco Mints. By the time most coin dealers get in a smaller supply of these coins from the larger wholesalers, retail customers could easily be paying $3-$4 per coin above the silver spot price to purchase a 500-coin box of silver Eagles.

The silver Eagle may not be the best way to own bulk silver.

At those premiums, retail buyers would now be paying 15-20 percent or more above the intrinsic metal value of silver Eagles.

These coins have been hugely popular, with combined mintages since the series debuted in 1986 of more than 200 million coins. In absolute terms, even the lowest-mintage 1996-dated coins cannot be called rare.

It is possible to buy the old U.S. 90 percent silver dimes and quarters (and often half dollars) struck up to 1964 at a lower cost per ounce of silver content.  Privately manufactured silver rounds and ingots in sizes of 1, 10, and 100 ounces can also be acquired for a lower premium than silver Eagles.

So, are silver Eagles a good way to purchase bullion-priced silver?

There are a number of hard money writers who consider the silver Eagles to be the best option for buyers. Others, including me, consider their premiums to be too much higher than other options to recommend them. You can’t have it both ways, so whose advice is sounder?

The silver Eagles have multiple advantages where it is an exact one troy ounce of pure silver issued by a reliable entity.  It has legal tender status by having a $1 face value, which means that they can cross international borders almost everywhere around the globe without having to pay import taxes.

Do these advantages outweigh other options, where U.S. 90 percent silver coins do not come to an even ounce weight of silver per $1 of face value, or where the privately struck silver rounds and ingots are normally subject to import duties if they cross borders?

I place more emphasis on the cost per ounce of silver content, which is the main reason why I am not in favor of purchasing large quantities of silver Eagles as a way to own bulk silver. However, I realize that silver Eagles are beautiful works of art. Therefore, I don’t knock the idea of purchasing individual coins or even a roll or two to be part of a collection or to be given as gifts.

Instead, I favor lower-premium alternatives despite the popularity of silver Eagles, where my company alone has sold as many as 300,000 of these coins in a single year.

Many buyers of silver Eagles realize they are paying a higher price to acquire silver in this form versus lower premium options. A number of them have told me that they expect to be able to liquidate these coins at prices higher than what they would be paid for the rounds and ingots or U.S. 90 silver coins. If that is what really happens, then it is not such a downside risk purchasing silver Eagles today.

But – don’t count on being able to receive a payment per ounce of silver content any higher than you would be paid for the 90 percent silver Coins or rounds and ingots. Here is one example why I say this.

In late 1996, Warren Buffett’s Berkshire Hathaway purchased 129.7 million ounces of silver futures contracts due in March 1997. As the maturity date neared, Berkshire Hathaway stated that they intended to take physical delivery of all the contracts rather than simply rolling the contracts over into new paper contracts with maturity dates farther in the future.

This quantity of physical silver demand severely strained existing supplies. Before Berkshire Hathaway announced that they wanted physical delivery, the spot price of silver was about $6. At that level, we were paying the public 50 cents under spot for the private one-ounce silver rounds and ingots and 50 cents over spot for silver Eagles.

Demand for low premium silver that the refiners could melt and form into deliverable 1,000-ounce bars to fulfill Berkshire Hathaway’s contracts pushed up the silver spot price.

By March 1997, the spot price topped $7. When silver reached that level, we were still paying 50 cents per ounce under spot to purchase one-ounce silver rounds and ingots from the public. However, since the refiners had no interest in purchasing any product even at spot price (the price at which they were being paid for the 1,000-ounce bars), silver Eagles did not appreciate at all during this run-up in the spot price. When silver reached $7 per ounce, we were then paying 50 cents per ounce below the spot price to purchase silver Eagles.

In this instance, the spot price of silver rose about 14 percent. The price we were paying the public to purchase one-ounce rounds and ingots rose 18 percent. Yet, the price we were paying for silver Eagles was unchanged.

As demonstrated by this example, I don’t recommend the purchase of silver Eagles as a way to acquire a quantity of bullion-priced bulk physical silver.

Incidentally, the rumor that circulated afterwards was that Berkshire Hathaway granted an extra six months to the short-sellers of the silver contracts, but the sellers had to pay the company 50 cents per ounce for the additional time.

Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He owns Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Coin Week (http://www.coinweek.com and http://www.coininfo.com). He also writes a bi-monthly column on collectibles for “The Greater Lansing Business Monthly” (http://www.lansingbusinessmonthly.com/articles/department-columns).His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com).  

via numismaticnews