I heard some disturbing reports about the silver supply last month that I felt every investor should know [about] and while precious metals are currently in correction mode, the long-term concerns with supply won’t disappear anytime soon. In an 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 might just compel you to count how many ounces you own. Words: 2020
So says Jeff Clark (www.caseyresearch.com) in an article* which Lorimer Wilson, editor of www.munKNEE.com, has reformatted and edited […] below for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.) Clark goes on to say:[In response to the many questions I put to Schectman in a recent conversation he offered considerable insight into the current silver market and concluded with some excellent advice on what action to take given the current circumstances:]
Why is there a shortage of silver coins?
[In reply to my suggestion that the shortage of coins might be just] 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, Schectman replied:
The silver 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 U.S. 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 U.S. Mint products in the country.
All this is occurring in an environment that has only minimal participation by the masses. Few people in this country have ever even held a gold or 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.
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 U.S. 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.
How extensive is the secondary market for silver?
There is no secondary market (the term “secondary market” in this instance means sellers of bullion and not the scrap 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 – U.S., 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.
Is demand for silver bullion increasing?
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.
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.
Why are premiums for silver so high?
Premiums are changing literally overnight because the availability of product is getting smaller and smaller and the demand is getting stronger and stronger 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.
Why the increased interest from fund managers?
I think it’s coming from their clients. It is 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 are 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. It is my impression now, however, that they are 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.
Are we near a top in the PM markets?
With all the aforementioned new buying I asked Andy if we might be near a top in the market and he just laughed saying:
No, no. I think Richard Russell says it best: “Bull markets die of exhaustion and over participation.” Well, we are 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 over participated market. We’re nowhere near that.
What is the best buy in silver these days?
The very best buys in silver right now,[ in order, are:]
- Junk silver. By the way, I think the term “junk” is unfair [because] 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… Junk silver has the lowest premium right now and, in my opinion, offers the best upside potential.
- 10- and 100-ounce silver bars.
- 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.
What about gold?
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 Krugerands and they all have decent premiums.
What should we do given the current situation?
- 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.
- 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.
- 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 U.S. 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…
- [In summary,] 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.
Some other articles on silver that may be of interest:
- “At What Price Should We Begin Buying Silver Again?” www.munknee.com/2011/0…/
- “Martin Armstrong Asks: Will Silver Crash (Further) in 2011?” www.munknee.com/2011/0…/
- “Three Peaks” Pattern Suggests Gold to Decline 17% into June!” www.munknee.com/2011/0…/
- “Elliott Wave Analyst Suggests Silver to See $52.58 by Mid -June” www.munknee.com/2011/0…/
- “Goldrunner: “$52.80 to $56 Silver by Mid-year” Update” www.munknee.com/2011/0…/
- “NOW is the Best Time to Buy Gold (and Silver) Stocks! Here’s Why” www.munknee.com/2011/0…/
- “The “Secret” World of Gold & Silver Company Warrants” www.munknee.com/2011/0…/
- “Buying Gold & Silver Company Warrants is Easy & Profitable – Here’s How (and Why!)” www.munknee.com/2011/0…/
- ” Why Silver at $398.52 is a Realistic Parabolic Peak Price” www.munknee.com/2011/0…/
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above.