HOUSTON – Late last year, when both gold and silver were sold down along with everything else in a sell-anything-with-a-bid panic, the world was getting pretty scary. Demand for physical bullion, real gold and silver coins and bars, outstripped dealers’ ability to supply the metal to investors anywhere near spot prices. Premiums, the amount charged and paid by dealers over the prevailing cash or spot prices, skyrocketed to record or near record levels.
During the panic, citizens everywhere wanted to get their wealth out of banks, out of stocks and other investments, into cash and into something, anything they perceived as safe. For a growing number of investors that also meant putting some of their wealth into the one thing people have trusted as a store of value for thousands of years – precious metals, gold and silver.
Two separate markets for gold and silver developed during the crisis. There was one market for small amounts of bullion, the so-called “retail” bullion market and one for the very large commercial-sized bars that trade on the futures and global over-the-counter (OTC) markets. The cash or “spot” price tracks the larger, futures-related market which, in the fall of 2008, was under tremendous pressure from large holders seeking liquidity, massive deleveraging and that market fell prey to opportunistic sell-side traders taking advantage of the extreme volatility.
The retail bullion market disconnected from those artificially low spot prices as the very high premiums of the panic period show. Now that both gold and silver have returned to higher prices and the world has less fear of a global systemic economic collapse (at least for now), the physical bullion markets have returned to premium levels that are approaching normal.
Premiums reflect demand
In more normal markets there is usually ample supply from both buyers and sellers in the smaller, retail bullion markets, but as we have just witnessed, when there is significant fear and more people want to buy metal than sell it, something has to offset that demand/supply imbalance. That’s where premiums come in.
Premiums are a direct gauge of retail demand for precious metals. Very simply, the higher the premiums, the higher the current demand at current cash or spot bullion prices for the smaller bullion items most people are able to trade.
The chart just below is a monthly recap of wholesale market for one-ounce gold Krugerrands as reported by Coin Dealer Newsletter (CDN), one of the most respected authorities in the popular rare coin and bullion industry.
Source for bullion premium charts: CDN Greysheet
The chart tracks dealer bid prices as reported weekly by CDN in their industry trade newsletter The Greysheet. From January 2006 to the summer of 2008, dealers were willing to buy one-ounce Krugerrands for resale to their clients from about spot gold to a high of about $8.00 over spot, while the spot price of gold itself rose from the $500s to the $900s. So even though the price of gold was on the rise, there was apparently enough gold metal changing hands to keep premiums from going up very much.
Then, beginning in August 2008, as the panic was getting underway and demand for real physical gold heated up, dealers found themselves having to offer more than spot in order to source precious material for their clients. Dealer bid premiums for “K-Rands” jumped from $13.00 over spot in the August 29 CDN to $35.00 over spot in the October 31, 2008, report.
Availability remained constrained and premiums remained elevated in the first part of this year as spot gold gradually recovered back into the $900s and equity markets all across the globe found at least an interim bottom in March. With $900-plus gold and improving stock markets since then, dealers have seen the physical metal markets loosening up, with finally enough people willing to sell their gold coins nearer to current spot prices. The number of buyers and sellers has become more balanced.
By June 5, 2009, for example, the CDN quoted dealer bid premium for one-ounce gold Krugerrands had come in to $8.00 over the then $978.60 spot gold price.
While these prices represented the industry benchmark, they do not reflect the extremes seen locally and in numerous locations across the country. Some dealers were offering double the CDN bids at times during the October-November panic, as spot gold fell sharply into the $700s. They had to in order to fill orders from their gold buying clients who just wanted the metal no matter the premium.
Although they get that way from time to time, markets rarely remain unbalanced for very long.
It was the same high-demand-low-availability picture for all gold bullion coins during the panic period. Below is the same chart for U.S. one-ounce gold eagles for comparison.
U.S. gold eagles are arguably the most popular gold coin in North America and they still fetch considerably more than the spot price in the U.S. than South African Krugerrands. As of June 5, for example, with “K-Rands” showing an $8.00 premium, U.S. eagles were bid $25.40 over spot according to CDN. Still, that is a lot less than in last October and November, when they were “bid” $46.50 over spot according to CDN, and some dealers were actually paying nearly double that premium. That was with gold then in the $750s to the $850s more or less.
Needless to say that if dealers were paying that much they were selling those same coins for even more.
Silver premiums reached extremes
Even more dramatic was the premium action in the retail physical silver market. Just below is the same graph for U.S. silver eagles, again as reported by CDN.
Note, please, that no matter where the silver price was from January 2006, until the summer of 2008, the quoted dealer premium for U.S. silver eagles remained generally just above $1.00 over the spot price of silver. Then last August premiums spiked up as the futures dominated spot price of silver fell off the proverbial cliff. Panic drove the futures price of very large commercial sized bars of the metal from around $19 an ounce in July to below $9.00 in October in the worst plunge for silver since 1980. But demand for smaller amounts of real physical silver, especially silver coins and silver bullion coins, skyrocketed at the same time and dealers scrambled to find metal to fill orders.
In the most bizarre and, at times, frustrating of markets last fall the public really, really wanted to buy silver at the artificially low panic prices, but since there were so few sellers, dealers were forced to keep raising premiums to coax at least some metal to the market. Dealer quoted bid premiums for U.S. silver eagles reached record levels of over $4.00 above the spot silver price in November. On November 28, 2008, CDN reported the average dealer bid for silver eagles at $4.15, or 45.1%, over the then spot silver price of $10.36 an ounce, for example.
As silver recovered back up to the $15 arena premiums have returned to near normal, however. On June 5, for example, with silver at $15.73 the ounce, CDN reported the dealer bid for silver eagles at $1.27 an ounce over spot silver, very close to where premiums were in March 2008, with silver then in the $17 neighborhood.
“90% bags” a better buy
One of the most versatile and logical ways of owning physical silver is old U.S. dimes, quarters and half dollars minted before 1965. Sold in cloth bags containing $1,000 in face value, these so-called “junk silver” coins contain 90% silver and the rest of the gross weight is copper. Also called “90% bags” or just “90%” by dealers, each bag contains about 715 ounces of pure silver. The buyer essentially pays for the silver only in these bags of coins.
For years the relatively plentiful 90% bags traded at a slight discount to spot silver. During the heat of the crisis, however, dealer bid premiums jumped up to levels not seen since 1980, and then only at much, much higher silver prices. The chart just below tracks premiums for 90% U.S. silver coins in $1,000 face value bags according to CDN.
The usually always available bags of old coins were in such high demand last October and November, and so few of them were coming on the market then with silver around or below $10.00 the ounce, that by October 31, with silver then at $9.20 the ounce dealers were paying an average of $3.81 over spot silver to acquire them. That was a huge 41.4% higher than spot for a product that usually trades at a slight discount, but for most dealers even that wasn’t enough to call out very much silver from hiding.
Take a look at how constant the market was for 90% silver coins until the panic escalated last summer. No matter what silver was doing dealers consistently offered about 50 cents an ounce less than spot silver to buy the bags of 90% silver coins. Most dealers charged a reasonable markup above that to sell them, usually about $200 to $300 per bag over their buy price, or somewhere close to the then prevailing spot price per ounce of pure silver.
Dealers have a kind of shorthand for quoting the old coins. They speak in terms of face value, as in “10.9 times face.” That was the quoted dealer bid price for 90% as of June 5, according to CDN, meaning that dealers were willing to pay 10.9 times face value in order to buy the coins. CDN says that dealers were also willing to sell the bags that same day at 11.2 times face value, or $11,200 per $1,000 face value bag.
Isn’t it interesting to know that silver coins minted just 45 years ago now fetch 11 times their value then? That is the power of inflation at work. But it is not for just any coins minted then, it is for silver coins. Believe it or not, as high as 11 times face sounds, that multiple of real silver coins is actually substantially less than it should be if we compare where silver historically trades relative to gold, but that is beyond the scope of this report. Suffice it to say that silver remains “cheap” relative to gold in many relative metrics, including its relative purchasing power to gold. We’ll undoubtedly have more about that in future reports.
By the way, at Got Gold Report we favor 90% silver U.S. coins as the preferred way to own physical silver and we have since the early retail coin shop days in the 1980s. They usually trade at a slight discount in more normal markets so one can own more silver for the same amount of money invested. They are very easily divisible into smaller units, everyone understands what they are, they are very difficult (and unprofitable) to counterfeit and they are always in high demand. We believe that over time they will once again trade at substantial premiums, so while we have the opportunity to buy them at or even below spot, they take the point in our silver preference line up.
In case it isn’t obvious, when the world was terrified people turned to the same thing they have trusted as a store of value for over four millennia, the one thing that people in all countries, in all cultures, respect and understand as real money – gold and silver. The jump in premiums shown above proves that.
Precious metals are presently in a correction, sending late comers to the rally and the nervous to the sidelines. While the current respite from high precious metals premiums means that buying and selling pressure have become more balanced (for now), is it merely the calm before the storm?
Read more Stockhouse articles by Gene Arensberg