30
Oct
2008

Silver Bullion Premiums Foretell a Price Surge

Seeking Alpha has an interesting article regarding Silver Bullion premiums, though this is at the moment somewhat irrelevant since the market for 100oz bars is nearly non-existent.

There has been much recent coverage of the rising premiums being paid to purchase physical gold and silver bullion. This has been cited as a consequence of the extreme demand for precious metals and evidence of the growing disconnect between market prices and physical prices. I decided to look at some data to calculate exactly what kind of premiums are being paid and see if any trend or patterns in the data could be determined. Specifically, I looked at selling prices for 100 ounce silver bars on eBay. I decided to use this as a source of data since 100 ounce silver bars have historically been a low premium method to acquire silver.  Also, bars of silver are relatively undifferentiated. Bullion coins from different countries or with different dates often carry premiums based on those differences. I used eBay data because it was accessible. Completed auction records can be obtained for the prior two weeks or more. Also, I believe that eBay represents a real time, liquid market of buyers and sellers who discover prices through a bidding process. Quoted dealer prices may be for delivery at a later date and may not represent actual available supplies. There are some possible flaws with this method. It does not take into account potential premiums for different manufacturers. I don’t know if people pay more for different makes of bars. Also, shipping costs are not included in the price data used. Some auctions may carry higher shipping charges which would impact the final selling prices. And lastly, some auctions were “true auctions” which start at a minimal opening bid while others were fixed price listings. Data was available from October 13 to yesterday’s date. I did not include data for yesterday or October 13, since it may represent partial data. I determined the average price for each day’s auctions which closed with a sale. I compared this to the closing market price of silver for each day. Here is a summary of the data: Average Price for 100 Ounce Silver Bars on eBay Compared to Market Price of Silver

Date Bars Sold Ave Price Market Price Premium Premium %
14-Oct 12 $1,557.17 $10.89 $468.17 42.99%
15-Oct 10 $1,524.70 $10.92 $432.70 39.62%
16-Oct 29 $1,465.07 $9.99 $466.07 46.65%
17-Oct 19 $1,427.68 $9.56 $471.68 49.34%
18-Oct 28 $1,422.00 $9.56 $466.00 48.74%
19-Oct 46 $1,419.04 $9.56 $463.04 48.44%
20-Oct 21 $1,431.76 $9.79 $452.76 46.25%
21-Oct 17 $1,391.94 $9.86 $405.94 41.17%
22-Oct 19 $1,428.11 $9.84 $444.11 45.13%
23-Oct 25 $1,382.84 $9.34 $448.84 48.06%
24-Oct 37 $1,367.78 $8.88 $479.78 54.03%
25-Oct 13 $1,389.31 $8.88 $501.31 56.45%
26-Oct 33 $1,329.91 $8.88 $441.91 49.76%
27-Oct 15 $1,337.33 $9.01 $436.33 48.43%

Some charts based on this data appear below. The data is only for a limited time frame, but it does spur some interesting observations. The premium paid for a 100 ounce silver bar has ranged from 39.62% to 56.45%. The premium represents the amount paid in excess of the so-called “market price” of silver. People are clearly paying astounding premiums to acquire physical silver. On October 15 and 22, the market price of silver dropped. In each instance this caused the percentage premium to rise. This lends some evidence to the anecdotal observation that a decline in market price only spurs greater demand for the physical metal. Two distinct prices for silver seem to exist. The paper price for the contractual right to acquire future silver, and the physical price to acquire real silver, in hand. How and when will this situation resolve itself? There have been several recent reports of bullion buyers seeking to take physical delivery of silver and gold from the COMEX. This would allow buyers to purchase real silver at the heretofore “fictional” paper price. If these deliveries take place and become a dependable source of purchasing physical silver, premiums for 100 ounce bars and other physical silver would likely begin to subside. On the other hand, some are voicing the possibility that since the COMEX only has small coverage of physical metal for outstanding contacts, if enough contact holders demand delivery they will be forced to default and settle in cash. If this occurs, the likely result would be soaring market prices for silver and potentially greater premiums as the argument for physical scarcity gains another leg of support.

On a related note, The Mogambo Guru’s recent article: A Bull in a Silver Shop has some choice quotes:

[…]Ted Butler, silver market analyst, reports that in the last 10 months, "some 150 million ounces of silver can easily be documented to have been bought by investors. Undocumented purchases would add tens of millions more ounces." In fact, when you add it all up, "Investment demand for silver this year is running at a full 25% of world mine production and over 20% of total production (including recycling). This is a remarkable historical turnabout." Thus, it is easy to see why Mr. Butler is "bullish beyond belief for silver", since this kind of demand means that "In silver, the documented 150 million ounces bought in the first ten months of this year is equal to 15% of all the silver bullion equivalent thought to exist!" Wow! More than one-seventh of all the silver bullion "thought to exist" in the whole world was suddenly bought up in less than a year, and yet the price of silver has been pounded down to less than 10 bucks an ounce? No wonder I am so bullish on silver! He also notes that the gold/silver ratio is at more than 80, which is "one of the biggest differences in history." And not only that, but since there are 4 to 5 billion ounces of gold in the world versus only 1 billion ounces of silver, that means that "the total dollar value of all the gold in the world is worth 300 to 400 times more than all the silver in the world (80 times 4 or 5)". In dollars and cents, the dollar value of all the gold in the world is about $4 trillion, while the value of all the silver in the world is but a laughably low $10 billion! Where do YOU think the most profit potential lies? Me, too! Hey! This investing stuff is easy! Whee!

Mark OByrne