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Gold coin premiums shoot up...
WHILE precious metals are currently in correction mode, the long-term concerns with supply won't disappear anytime soon, reckons Jeff Clark, editor of Casey Research's Big Gold newsletter.
In attempt to get a handle on the Bullion market, I spoke to Andy Schectman of Miles Franklin, who has contacts that run deep in the industry. What he sees everyday – especially the shortages in gold and silver coins – might just compel you to count how many ounces you own…
Jeff Clark: Andy, tell us about your industry contacts and how you get the information you're privy to.
Andy Schectman: We source our product from three of the largest six primary US mint distributors. Having 20 years of experience with these sources, as well as the dealers in the secondary market, we're as tied into the industry as anyone.
Jeff: You made some interesting comments to me about supply and premiums. Tell us what you're hearing and seeing in the Bullion market right now.
Andy Schectman: I feel as though I'm the boy who cries wolf or that I've been beating the same drum for too long. But in reality, it has been my feeling since late 2007 that ultimately this market will be defined less by the price going parabolic – which I think ultimately will happen – and more by a lack of supply. You see occasional reports that state it's just a lack of refined silver or lack of silver in investable form. But as far as I'm concerned, there is a major supply deficit issue, and it's getting worse.
Take the US Mint, for example. Right now, as we talk, you can barely get silver Eagles. We're seeing delivery delays of three to four weeks, and premium hikes of a Dollar or more in the last three weeks. Most of the suppliers in the country are reluctant to take large orders on silver Eagles because they don't know (a) when they'll get them, and (b) what the premiums will be when they arrive.
I was talking to the head of Prudential Bache and asked him about silver Eagles. He said, "You know, as soon as the allocations come in, they're sold out. We can't keep them in." This is coming from one of the largest distributors of US Mint products in the country.
And this is all occurring in an environment that has only minimal participation by the masses. Few people in this country have ever even held a Gold Coin or a silver coin. So, if it's this difficult to get Bullion now, what's it going to be like when it becomes evident to the masses they need to buy? This is what keeps me up at night.
Jeff: Some analysts say it's a bottleneck issue, that the mints have enough stock but just need more time or more workers to fabricate the metal into the bars and coins customers want.
Andy Schectman: No, I don't believe that. What business do you know that if they had that much profit potential wouldn't increase production and hire more workers to meet demand? To me, the "inefficient model" argument is an excuse.
Look at what the US Mint alone has done: they haven't made the platinum Eagle since 2008. They make maybe one-tenth as many gold Buffalos as they do gold Eagles. They've made hardly any fractional-ounce gold Eagles. Heck, they can't even keep up with the demand for the products they do offer. Does that sound like a bottleneck to you? Or is it because there is far more demand than there is available supply? It's pretty clear to me it's the latter.
Jeff: What are you seeing in the secondary market; are investors selling Bullion?
Andy Schectman: There is no secondary market. Absolutely none. Nobody is selling back anything, at least not to us. Think about that: if this was a traditional investment and your portfolio went up 100% in the last year, like silver has, you'd think some investors would take some profits and ride the rest out – but nobody's selling anything.
This is why I think the lack of supply is the single biggest issue in this market. And in time, I think it will become much more obvious.
There are only five major mints – US, Canada, South Africa, Austria and Australia. Yes, there is a Chinese Mint and a couple Swiss Mints and some private refiners, but they amount to very little in the overall scheme of things. We're in a situation where the mints are limiting the selection and raising the premiums, and this is occurring at a time when most people own no Bullion. As it becomes more apparent that people want Bullion instead of paper Dollars, I think you'll see premiums go parabolic and supply get even tighter.
Jeff: Are you getting a lot of new buyers to the Bullion market?
Andy Schectman: More than ever. One of the interesting things we're seeing is a lot of younger people dipping a toe in the water, buying little bits of silver here and there. We're also seeing bigger orders, as well as more frequent phone calls from financial advisers asking us if we can help their clients. So yes, the base is broadening.
Jeff: That's very interesting. So are you seeing more demand for gold or Silver Bullion right now?
Andy Schectman: 90% of the new business is in silver. And I think that's indicative of the state of the economy. People are trying to get into precious metals, but they think gold is too high. I think they're Buying Silver because they realize the fundamentals for owning gold also apply to silver. They think the profit potential is better in silver, too. This has actually made the supply for gold better than it is for silver right now, and a lot of that has to do with price.
Jeff: Why are premiums fluctuating so frequently?
Andy Schectman: Premiums are almost impossible to gauge right now. Because the availability of product is getting smaller and smaller and the demand is getting stronger and stronger, premiums are changing literally overnight. And it doesn't take many large investors around the country to force premiums higher.
The net of this is that it's really hard for us to be able to say what the premium for a specific product will be two weeks out.
Jeff: You mentioned increased interest from fund managers. Tell us the kind of comments you're hearing and why they're buying Bullion.
Andy Schectman: I think it's coming from their clients. It's my impression that people are taking it upon themselves to study a little bit more, to be more accountable for their assets, and I think they're telling their financial advisors to Buy Gold. And in some cases it's because they don't want a paper derivative.
It's no secret that financial advisors don't like gold and silver. Once money goes to a Bullion dealer, it's not coming back to a stock portfolio anytime soon, so they discredit it. But now it's my impression they're being asked by their clients to buy it. So it's not necessarily because the financial advisor wants gold as much as it is the client requesting it.
Here's a good example. There's a firm here in Minneapolis that represents the Pillsbury fortune, and they asked me to talk to their partners about precious metals a few months ago. At the end of the conversation they said, "Okay, we're going to place an order for one of our clients." Upon hearing it was for one client, I thought it would be in the range of $50,000 to $100,000. Well, the order was for $5 million.
There are two astonishing things about this. First, that's twice as big as the largest order I've ever had. It was one order, for one client, who's brand new to the market. How many more potential buyers are out there like that?
Second, they made it abundantly clear to me that it was out of pressure from one of their clients that they sought me out. So clients are increasingly demanding Bullion, regardless of what their financial advisers say.
Jeff: Hearing about all this new buying might make some think we're near a top in the market. Could that be the case?
Andy Schectman: No, no. I think Richard Russell says it best: "Bull markets die of exhaustion and overparticipation." Well, we're nowhere near that point when so few people in this country own gold and silver. Heck, I'm a Bullion dealer, and most of my peers don't own any gold and silver! Yes, you're seeing more commercials, but there are just as many commercials to Buy Gold as there are to sell it. I think that's an indication this market is not exhausted.
Remember that in the year 2000 everyone and his brother had some NASDAQ shares. That's an example of an exhausted or overparticipated market. We're nowhere near that.
Jeff: Where are the best premiums for silver?
Andy Schectman: The very best buy in silver right now is junk silver. And by the way, I think the term "junk" is unfair. It isn't junk anymore. It used to be junk in the ‘90s when silver was 3 or 4 bucks an ounce and it was sold basically at melt value and carried no premium. So I'd call it "90% dimes and quarters." Anyway, junk silver has the lowest premium right now and, in my opinion, offers the best upside potential.
Next would be 10- and 100-ounce Silver Bars. And then one-ounce silver coins – but the Eagles are very expensive at the moment, if you can get them. The Austrian Philharmonic has the best value in a one-ounce silver coin right now, and they're available. But again, premiums for all silver coins are escalating.
Jeff: What about gold?
Andy Schectman: Gold is not as bad. In fact, I would say that gold availability is decent right now for one-ounce coins and bars. There isn't much available in fractionals. And Buffalos are still kind of hard to get. Other than that, the one-ounce coins with decent availability are Canadian Maple Leafs, Australian Kangaroos, and Krugerrands. And they all have decent premiums.
Jeff: So the take-away message is what?
Andy Schectman: First, I think you said it best with your recommendation to "accumulate." Not only will it smooth out the volatility in price and premiums you pay, it will also give you a bird in the hand. If I'm right about this market, and I really believe I am, it will be defined by lack of availability of refined product. To combat that, just accumulate month in and month out, and be thankful when you're able to get what you want.
Second, it's about the number of ounces you own. You want to get as many ounces as you can without being penny wise and pound foolish. Stick with the most recognized products – don't buy 1,000-ounce bars, for example, because they're illiquid. You want to maximize your liquidity, and you do that by buying the most common forms of Bullion – one-ounce coins, bars, and rounds; 10- and 100-ounce products; and junk silver.
Last, keep in mind that premium and commission are two different animals. Commission is what the dealers make on top of the premium. Premium is what the industry bears. So if the US Mint is selling silver Eagles for $3 over spot to the distributors, that's before they're marked up to the public. So even though the "premium" is high, you're actually going to get most of that back when you sell.
So, Buy Gold and silver while it's available, even if you don't buy it from me, because if I'm right, getting it at all could soon be your biggest challenge.
Jeff: Thanks for your insights, Andy.
Submitted by Tyler Durden on 01/18/2011 15:22 -0500
Our friends at GoldCore have summarized recent shortages in the silver market and provide some observations on what this could mean for future silver prices. Curiously, the lack of inventory has happened even as the spot price of silver has consistently declined over the past week (if nominally the decline has been very modest). Just as curiously after the US Mint reported a massive surge in buying, the number of January sales has been fixed flat at 3,407,000, where it was a week ago, and indicates that either buying interest has ceased overnight (unlikely), that the mint is not updating its numbers (likely), or, worse, that the Mint has now stopped selling any form of silver for reasons unknown. Although at the end of the day the only question worth asking is whether JPM feels lucky (again): as we posted last week, the firm has received "grandfathering" protection from position limits, arguably the biggest reason for the recent drop in the precious metal price.
Silver Bar Shortages to Lead to Price “Tipping Point”?
Gold is mixed while silver is higher in all currencies today, especially in the weaker US dollar. European sovereign bond yields are higher and the UK 10-year has risen to 3.66% and is close to breaking out after inflation figures surprised the majority of analysts who remain complacent about inflation.
Gold is currently trading at $1,370.75/oz, €1,022.11/oz and £856.57/oz.
Equities in Asia were higher as are those in Europe so far today. US equity index futures are mixed with Apple leading to weakness in the Nasdaq; the S&P 500 is flat.
Silver is currently trading $28.81/oz, €21.48/oz and £18.01/oz.
Reports of shortages of silver bullion continue to grow. While there are no widespread shortages in this area and dealers with extensive supplier networks (mints and large refiners) are not experiencing difficulties sourcing bullion inventory, it would be wise to keep an eye on this.
Silver in USD – 35 Years – (Weekly). Click for full size
Reuters reported shortages of 1 kilo gold bars in Asia last week. Sprott Asset Management reported that it was experiencing difficulty sourcing 1,000 oz silver bars. Sprott said they were concerned about the “illiquidity in the physical silver market" and said delays in being able to source physical silver highlights the “disconnect that exists between the paper and physical markets for silver."
Zero Hedge reported that Bullion Vault, the digital gold provider, had run out physical silver inventories in Germany (and possibly elsewhere) and was advising clients to buy silver from other sources.
Zero Hedge also reported yesterday that some smaller bullion dealers in the UK were having difficulty sourcing all silver bars and had delayed delivery of silver bars (including 1 kilo silver bars) until February.
This comes at a time when the US Mint has reported huge demand in the first two weeks of January for their very popular US Silver Eagle 1 oz bullion coins.
Click for full size
At about $33, €25 or £20 a coin, collectors and those seeking financial insurance have been buying silver in very significant quantities. The 2011 minted coins were first issued on January 3 and in just the first two weeks, 3.5 million coins were sold, according to numismatic web site Coin News.
In January 2009, the silver coins first topped the 3 million sales mark, with record sales totaling 3.59 million for the entire month.
If sales continue at these levels, that record should be surpassed this week. The all time monthly record of 4.26 million silver coins, which was set last November, is clearly in sight.
A recent report by analyst Adrian Douglas of GATA warns of forthcoming shortages of gold and silver bullion coins and bars, and that a “tipping point” will soon be reached that could lead to a COMEX default and a short squeeze which leads to much higher prices. Douglas himself has shown in Le Metropole Café how Comex silver inventories are shrinking and are not far from ten year lows.
The “bear raids” by the large concentrated shorts being investigated by the CFTC, are only leading to increased physical off-take. Indeed, the selling raids may be leading some participants on the COMEX (including large hedge funds) to take delivery or sell futures and buy bullion in allocated accounts.
None of the factors, in and of themselves, suggest that widespread shortages of silver (or gold) bullion are imminent in the immediate future. However, much circumstantial evidence suggests, especially the bona fide reports of difficulty in sourcing large silver bars, that the supply and demand balance in the silver market is very tight.
The more than 80% increase in the silver price seen in 2010 is not leading to an increased supply of silver but rather to a continuing and possibly increasing demand.
This is not surprising as silver is a byproduct of base metals and therefore its price increase will not have led to any material increase in silver mine production. This fact is known by most buyers of silver coins and bars and many of them continue to hold and add to their silver holdings in anticipation of much higher prices.
Silver at $50 per ounce and the 1980 adjusted for inflation price of $130 per ounce are conservative estimates for some silver enthusiasts. They have been proved right in recent years and the extremely delicate supply and demand equation in silver could see them proved right again in the coming months.
Since 2003, GoldCore have written research articles pointing out that the very small size of the silver bullion market would likely see its inflation adjusted high of $130/oz reached in the long term.
Interestingly, were gold to reach its adjusted for inflation 1980 price of $2,300 per ounce, and silver revert to its long term gold/silver ratio of 15:1 (geologically there are 15 parts of silver to every one part of gold in the Earth’s crust) then silver would reach over $150 per ounce.
While this seems über bullish to those who know little about the silver market, some silver enthusiasts - and there are many - believe that in time, silver will be valued at the same price as gold as huge quantities of silver have been used up in industrial applications since the Industrial Revolution of the 19th Century and throughout the 20th Century and into this millenium.
In these unprecedented financial and economic times, it is important to have a long term perspective.
KMG Gold Recycling saw a glut in the silver market in Decmber 2010. "We couldn't sell our silver to the secondary refineries." Said KMG president Michael Gupton, "We had to shop it around. That doesn't seem like a shortage of silver to me, that sounds like media manipulation".