Silver Price: The Least You Should Worry About By Jeff Clark | May
18, 2011
I heard some disturbing reports about silver supply last
month that I felt every investor should know. And while
precious metals are currently in correction mode, the long-term
concerns with supply won’t disappear anytime soon.
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 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 U.S. 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: 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 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.
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 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.
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: 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.
Jeff: What are you seeing in the secondary
market; are investors selling bullion?
Andy: 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. [Ed. Note: We’re using the term
“secondary market” in this instance to mean
sellers of bullion and not the scrap market.]
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.
Jeff: Are you getting a lot of new buyers
to the bullion market?
Andy: 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 right now?
Andy: 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: 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: 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: No, no [chuckles]. 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: 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: 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: 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 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. [Ed Note: It’s not uncommon for the
buyer to recapture most of the premium when they sell, particularly
during periods of high demand.]
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.