What You Need to Know about Silver Supply and Premiums
Lower precious metals prices on Wall Street aren't necessarily bringing lower prices on Main Street.
Both the U.S. Mint and the Royal Canadian Mint continue to run into serious issues keeping up with retail silver demand. And this week brings word of new silver shortage problems.
After selling out in early August, the U.S. Mint resumed deliveries of Silver American Eagles, but has since been rationing them out.
Mint officials let it be known they are cutting further back on its Silver Eagles shipments, reducing them as much as 20% below already insufficient inventory levels.
Dealers already had some catching up to do, and news from the Royal Canadian Mint late last week won't help either. RCM officials announced significant "problems" with sourcing silver blanks for production of the Silver Maple Leaf. At least one major wholesaler stopped accepting new orders for the popular coin all together.
The one-two punch of U.S. Mint and Royal Canadian Mint silver and gold rationing and production breakdowns promises to push up premiums on all government-minted silver coins for the foreseeable future.
Are Delivery Delays and Higher Premiums Reasonable?
Bullion investors watched spot prices fall relentlessly during the month of July and a whole lot of them decided to go bargain hunting. Unfortunately, when they called their dealer to buy silver, they found significantly higher premiums and delivery delays on most items.
Seizing the opportunity to buy silver on the cheap when spot prices fell below $15 per ounce has proven harder than many expected. (Although we've warned time and time again in the past that low silver prices do not guarantee investors will be able to take full advantage.)
Inventory constraints in the marketplace SO FAR are primarily a function of bottlenecks in manufacturing of certain products – not an outright shortage of raw silver grain or bars.
You can be assured that Money Metals Exchange will only accept orders for precious metals that we already own and for products we know we can fulfill. It is important to us to make commitments to customers up front about when we will deliver an order, and then meet (or exceed) those commitments. Quite frankly, some dealers operate differently – taking all the orders they can regardless and hoping and praying they can follow through as promised.
If the day comes that demand overwhelms fragile inventories, we will suspend sales of that item or even all items in that metal. We fully expect that day may come, and we frankly aren't looking forward to it. That would be a frustrating environment within which to operate – no business wants to be faced with huge demand and no product to sell!!
If your dealer is consistently missing commitments on delivery, or quoting delays significantly longer than other dealers, you should be wondering if the company truly is "selling silver they don't have." Shipment in one to two weeks after payment clearing is reasonable given current bottleneck conditions. Anything approaching a multi-month delay at this point should be viewed as unacceptable.
Demand during Price Drops Tends to Force Premiums Up
The physical market for precious metals, unlike the paper futures markets for gold and silver, DOES respond to real-world supply and demand fundamentals. This market is also extraordinarily competitive. Premiums have to be set at fair levels or customers go elsewhere.
One misconception is that higher premiums go straight into the dealers' pockets. In reality, the wholesale premiums and fabrication costs associated with securing inventory are also rising.
Dealers aggressively bid for scarce inventory and production capacity so their customers can access the supply they want.
That is why, in recent weeks, Money Metals Specialists actively encouraged customers to buy silver rounds, where premiums rose only modestly, and silver bars, where premiums increased only a few cents.
Even though Money Metals offers some of the most competitively low premiums in the market, premiums for popular coins such as the Silver American Eagle and Silver Maple Leaf have risen significantly, so we have recommended our customers consider the lower premium alternatives even more than ever.
Bargain hunting for bullion investors is best done when the physical markets are quiet and premiums coming down.