Silver Pro Tip: Lower Bid / Ask Spreads Mean Higher Returns
Demand for physical silver has been surging for most of the past two years. Buyers massively outnumber sellers.
Mints and refiners who produce bullion coins, rounds and bars have struggled to keep up. The industry has certainly not been immune from labor shortages and the challenging operating environment faced by most businesses.
The result has been higher premiums and wider bid/ask spreads for silver. Given the scarcity of supply and relentless demand, the bullion market will continue to be tight in 2022.
That said, some products represent a much better value than others.
The bid / ask spread represents the difference between what investors pay to buy and what they receive to sell a given bullion product.
Bid and ask premiums will change over time.
But they provide an indication of how good a “deal” the investor is getting right now.
It is, of course, generally a good idea to buy metal at the lowest overall price per ounce, provided investors avoid buying something that will be difficult to sell later. Beyond that, focusing on the bid / ask spread can improve returns on your precious metals investment.
We’ll illustrate using two products – one which has among the highest spreads currently and the one with the lowest.
The Silver American Eagle is one of the most popular products offered by any bullion dealer. Unfortunately, it is also very expensive these days, making its continued popularity somewhat mystifying.
The dysfunctional U.S. Mint isn’t anywhere close to minting "sufficient quantities to meet public demand," as required by law. Premiums have been bid up to all-time highs, and there are so many better product options to accumulate silver now…
The Silver Eagle coin currently has an ask premium of $8.49. At Money Metals, the bid is $5.25 and the difference, or spread, is $3.24. (Money Metals tends to offer the best bids when you sell as well.)
If the price of silver is $23/oz, a hypothetical investor with a $100,000 budget can purchase 3,175 Silver Eagles for $31.49/oz.
Suppose down the road when silver hits $30/oz, the investor decides to sell. And let’s say he receives the same bid premium of $5.25 on top of the market price – $35.25/ea. Multiply this price by 3,175 coins and the investor has $111,919 – a realized gain of $11,919 or about 12%.
If the U.S. Mint finally catches up with demand and premiums fall, the investor’s returns will suffer. Given that Eagle premiums are at all-time highs, the likelihood of this is high, especially if the spot price of silver rises and draws out more willing sellers looking to take profits.
What if the investor had focused on finding the lowest bid / ask spread and decided to purchase Vault Silver instead?
Vault silver currently has an ask premium of $1.60 and a bid premium of $.02. The spread is $1.58.
The investor buys metal at the $23/oz market price plus the $1.60 premium – $24.60/oz. He now owns 4,065 ozs of silver.
When silver rises to $30/oz and it is time to sell, the buyer receives $30.02/oz x 4,065 ounces – $122,031.30. His gain is 22% on Vault Silver ounces, instead of 12% on Silver Eagles.
In the latter scenario the investor’s returns get a boost from two forces. His spread – the transaction costs – were lower. And he purchased a lot more silver ounces because of the lower ask premium for Vault Silver versus Silver Eagles.
There may be no better strategy when it comes to buying physical silver than to obtain more ounces by purchasing low premium products with low bid / ask spreads.