Silver Bugs Cause Severe Coin Shortages

Some months ago, a close personal friend told me she was interested in investing a large sum (for her) in silver coins. This person has no experience whatsoever in investing in precious metals and limited investment knowledge in general. I questioned her reasons for wanting to invest most of her savings in silver, but I never quite figured out why.

Anyway, I tried to warn her about investing in commodities, in this case silver, and pointed out that there had recently been a historic bull market in precious metals, and more importantly, that gold and silver have a history of “falling off a cliff” after big bull markets. I strongly suggested that she hold off, at least until there was a significant downward correction in silver prices. I told her I would suggest a reputable coin dealer whenever it might be a good time to buy.

Fast forward to this month. As you probably know, gold and silver prices have crashed recently. Silver prices, after bottoming around $9 per ounce in October 2008, soared to a record high near $50 per ounce in late 2011 – a rise of 420%. Since then, it’s been mostly downhill for silver prices, culminating with a severe plunge this year, and especially in the last week or so. Spot silver is trading just above $23 per ounce as this is written. That’s a decline of more than 50%!

Price of silver

Late last week, as silver prices were plunging, I thought about my friend who wanted to buy silver coins. I thought this might be a time for her to start accumulating. So I called the coin dealer I have recommended for over 25 years – Camino Coin Company in California (800-348-8001) to check on the prices of “junk silver” coins (pre-1965 coins) and one-ounce silver “Eagles.” To my surprise, they said:

“We don’t have any junk silver or silver Eagles, and we don’t know when
we’ll get more. So we’re just not taking orders for any silver coins.”

I was stunned! So, I called another well-known coin dealer – David Hall Rare Coins – and they basically said the same thing, although they said that if I was willing to pay upfront with cleared funds, they would attempt to deliver the coins within a month. Not what I wanted to hear.

Mystified, I started to research this topic. It turns out that retail demand for silver coins started to explode in late 2012. In mid-December last year, the US Mint shut down the sales of silver Eagles for about three weeks. They resumed selling Eagles on January 7, and investors and dealers ordered almost four million of the coins in just that one day! By January 20, sales had topped six million coins, and the Mint again suspended sales of the coins in order to catch up.

Demand for silver Eagles has continued at record levels so far this year. As of April 6, the Mint reported that it has sold an unheard of 15.87 million one-ounce Eagles this year alone. The Mint also announced recently that it is rationing sales of Eagles to primary dealers only, and that they should expect continued delivery delays.

So what is causing this massive jump in demand for silver coins? I have a couple of theories. Silver has long been called “the poor man’s gold.” So it’s not surprising that retail investors are clamoring for silver coins as opposed to the much more expensive gold coins. But why the explosion in demand that began late last year? Two thoughts…

One, the explosion in demand started to escalate shortly after the Fed announced last September that it was increasing its QE purchases to a record $85 billion per month “INDEFINITELY.”  I believe that those inclined to own hard assets are convinced that this Fed policy will lead to significantly higher inflation in the future, and they are snatching up as many Eagles and junk silver coins as they can.

Two, I believe that the re-election of President Obama has caused many more investors to buy physical silver, especially silver Eagles which sell for about $3-$4 above the spot price of silver (just above $23 per ounce as this is written). Eagles are thus relatively inexpensive, and people are hoarding them (along with guns & ammo) in case there is another crisis.

That is, IF they can even find them!

Caution: with demand like this and widespread shortages, the premiums for these coins can be huge, especially at smaller or unreputable dealers. So be very careful if you feel you must buy silver coins in this environment.

Have a great weekend everyone!

Posted 04-23-2013 10:41 AM by Gary D. Halbert