QUESTION: Should I Buy Silver Now or Wait for Lower Premiums?
The silver futures price is near $15.50 per ounce but good luck buying the white metal anywhere near that price (with one notable exception discussed later).
The inventory of low-premium retail coins, rounds, and bars mostly disappeared in a matter of days when fears over COVID-19 pricked the bubble in global equity markets back in March.
Buying demand increased 5-fold and sellers all but vanished. Mints and refiners producing new products were unable to bridge the widening gap between supply and demand, and premiums exploded higher.
Today the lowest premium product available for delivery – the 10 oz silver bar – is sold at approximately $3.50/oz over the paper futures market price. The higher premiums on some coins – especially the Silver Eagle – are giving investors pause.
The question is whether or not to buy now or wait for better pricing.
Before we examine that question, we should point out that investors who don’t need physical possession of their metal don’t have to make this difficult choice.
We have two options for people who want to buy silver today, near the current paper price; Vault Silver and 1,000 ounce silver bars.
However, anyone who wants delivery of silver now does have to make a choice. The key consideration is when supply will once again be plentiful relative to demand.
These are the challenges to bringing more supply of retail coins, rounds, and bars to market:
- Mints and refiners need to ramp up production. That means hiring people and getting machinery up and running.
- All other considerations aside, it takes months to expand production capacity. Given these firms are emerging from several years of poor demand, they may be reluctant to make large investments right away.
- COVID-19 is disrupting supply and that may continue. Major Swiss refineries, the Royal Canadian Mint and the U.S. Mint have all dealt with temporary closures over the past 6 weeks. Going forward, these firms are likely to deal with any virus outbreaks by pausing operations once again.
- There are very few people selling bullion right now. We’ll need some combination of higher prices and lower fear before more metal can be pried loose from those who hold it.
Now let’s take a look at demand:
- Investor sentiment remains supportive of bullion buying. The bullion market went from being a sleepy backwater to a hot ticket.
- The recent rally in stock prices doesn’t seem to have changed that much. Lots of people recognize the rise in equities is 100% fueled by Fed stimulus and not by any improvement in fundamentals.
- There should be very few people left who view current monetary and fiscal policy as temporary. The Fed will continue suppressing interest rates and buying up bonds. Officials aren’t even talking about these measures being temporary anymore; that would be an obvious lie.
- One round of stimulus after another coupled with lower tax receipts will mean multi-trillion dollar deficits as far as the eye can see. We have entered the end-game for the U.S. dollar as the world reserve currency.
The case for falling demand in precious metals hinges on some sort of return to “normalcy”. COVID-19 will need to turn out to be less deadly and economically disruptive than people thought. And it’ll also take people fairly quickly going back to work and resuming their regular activities.
A return to normalcy is, in our view, a real long shot. The 25 million people who have already lost jobs won’t all have a job to go back to.
Many businesses will not weather this storm, and fear of the virus is going to permanently change consumer habits.
When we consider both supply and demand, the odds favor premiums remaining high for months (at a minimum). The wait for lower premiums could be a long one.
If you are contemplating an investment in physical metal as a safe haven, you need to consider whether or not you have the luxury of time. The less metal you currently hold, the more urgent it is to bite the bullet and start stacking.