The US Mint is acting quickly to reduce extreme demand for American Silver Eagles. Just this week, the Mint declared that it would raise dealer premiums from $1.50 per ounce to $2.00, squeezing profit margins on the coins for dealers and making physical metals far more expensive than the spot price.

Prices Change Globally

Within hours of the announcement, prices for American Silver Eagles around the world jumped $.50 as dealers prepared to pay higher prices for future silver supplies.

Similar to how gas stations raise prices before a change at the wholesale level, or how cigarette prices rise before a new tax, dealers have to allow the new price changes to set in before they actually do. In marketing, we'd call this “anchoring,” or setting a new default price before a change to help ease the pain before consumers go to buy their next round of a certain product, or in this case, silver.

The move from $1.50 over spot to $2.00 over spot is an effective nominal increase of 2.5% over spot metals prices. When silver is $22 at spot, dealers will pay $24.00, and the end consumer or investor should expect to pay another dollar over the wholesale price for a total price of $25.00. All told, a $1000 investment would only buy $880 of silver spot, a very high premium!

Unfortunately, the new premiums are starting to move into other coins, namely foreign sovereigns, where the price has risen to reflect a new guaranteed premium by the US Mint. At the time of writing, American Silver Eagles were selling at the near minimum price point of $25 per round, whereas Canadian Maple Leafs earned a similar price of $24.90.

Whether or not these new premiums will continue in the foreign sovereign market remains to be seen, however, dealers are apparently not having any problems making sales at a price 13.6% higher than spot.

Better Deals Elsewhere

Luckily for investors, some bargains still exist in junk metals and for silver bars. Premiums for these products have barely budged, with silver bars trading for just a fraction of a dollar over the spot metals' price.

Junk metals, by contrast, are trading at prices near or just a few pennies above spot price, as dealers look to reduce their holdings as silver makes new highs. The profit motive for dealers in junk silver is largely in appreciation and shipping premiums, where they make most of their profit.

Thankfully, silver prices soared in September, and dealers are locking in their profits by deeply “discounting” hordes of junk metals against American Silver Eagles and foreign sovereigns.

By Dr. Jeff Lewis

Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-Review.com

Copyright © 2010 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Comments

george franco
27 Oct 10, 16:37

Fraud

Dear DR Lewis,

Last year I purchased 57 Buffalo Gold Coins, grade 79.

After reading your material about silver I requested my dealer to exchange enough Buffalo Gold Coins to purshase 1000 one onunce silver eagles. I spoke with him days later and he said he did what I asked. However, in the past I was given a detailed invoice of my holdings. Now suddenly ll of my emails and calls are not answered. How does one who believes that he is fraueded do. Is their a national organization that I can complain to? Is there federal law that protects me? Should I just go to the local police and file a complaint? Please advise. Thank you.

Dr George Franco

Rick
27 Oct 10, 22:01

Fraud?

George: I'm not sure what exactly transpired between you and your (coin?) dealer, but I would be hesitant to make any rash decision as to whether any fraud has occured here. (Coin) dealers are registered with the U.S. government, and they are enjoying a fairly brisk business already. I'm sure that the last thing that they would want to do is to defraud someone; that would be the surest and quickest way to put themselves out of business.

My best suggestion is to e-mail and/or call your dealer again. If he is located locally, I would recommend making a personal visit. I think you will find that your dealer will gladly provide you with an invoice to your latest holdings.

Shelby Moore
28 Oct 10, 03:22

dealer hedging

Dr. Lewis wrote:

"Thankfully, silver prices soared in September, and dealers are locking in their profits by deeply “discounting” hordes of junk metals against American Silver Eagles and foreign sovereigns."

I don't think that correctly describes the business model of high-volume dealers, such as Tulving.

They try to be cash-agnostic, i.e. to keep their unit-of-account in metal ounces, and turn spread profits into increasing quantity of metal inventory.

Tulving has claimed in private that he does not use futures contracts to hedge his fiat cash. I think I finally figured out how he does this. The math may be a little bit deep for some people, so bear with me on this explanation, because it is a statistical gradient annealing method.

Every time he sells metals or buys metal over the phone (i.e. locks in a price), he enters this in a computer. The computer keeps a weighted (by metal ounces) average of the net price, where sales are added and buys are deducted. He must time his buys from manufactures to bring this weighted average net price towards zero, i.e. buy when ever the price is below his current average net price. Realize that in a secular metals bull market (as is case now) there should be many more buyers than sellers, thus much inventory has to be purchased from manufactures (i.e. he can decide when he buys). There is usually enough intra-day volatility to make this viable.

If the metal prices are racing up with most people buying and not selling much, and if there is insufficient volatility to capture a price below his current average net price, then he has to raise prices over spot, or borrow money to buy more from manufactures before the sales at higher prices.

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