How to Buy Physical Silver

When I interviewed gold and silver expert Doug Eberhardt last year about how to buy and sell physical gold and silver, he noted that he had a preferred way to purchase physical silver. He's detailed the reasons behind his thoughts in a recent post and I wanted to share the highlights with you.

There are two main ways to buy physical silver: bars or coins. Mr. Eberhardt prefers coins since they "can provide the means of profit as well as be used for barter should the economy slip to those depths in the future." Bars do not allow for both of these options. Therefore, in considering only silver coins, the race boils down to American Eagle Silver bullion coins versus 90% junk silver bags.

The post starts by acknowledging that 2010 was a banner year for Silver Eagle coins since 39 million were sold. This beats 2009 sales by over 11 million and 2008 by 20 million. Yikes! I guess there's nothing like silver going through the roof price-wise to drive sales, huh? But just what are all these people going to do with their silver when the price tanks? Hmmmmm.

Mr. Eberhardt then gets down to business with this common-sense approach to buying physical silver:

When making a decision to buy silver, you want to purchase the most silver for your money. This means, that you want to buy silver as close to the spot price as possible. For new investors, the “spot price” is simply what the price of silver is at any given moment in time, as priced on the exchange. You want to buy silver as close to this price as possible, taking into account there will be fees paid to the dealer for acquiring the silver (shipping, handling, commissions to dealer).

The problem is, not all silver purchases are alike. With certain types of silver coins, you have to pay more to acquire them. The question I ask of buyers is, why would you want to pay more? Isn’t the goal of acquiring silver to obtain as much as possible of the metal for your Federal Reserve Notes?

Uh, yeah. I'm in favor of getting the most silver for my money (assuming that's what I really want to buy.)

The post then compares the costs of American Eagle bullion silver coins to 90% silver bags of pre-1964 silver quarters and dimes. (The 90% silver bags have a face amount -- value of the quarters and dimes -- of $1,000 and contain 715 ounces of silver.) Because of their price premium as well as additional fees, you only get 3,139 ounces of silver for $100,000 invested in American Eagle bullion silver coins versus 3,421 ounces in 90% silver bags. This nets out to 9% more silver with the bags for the same cost.

He then assumes that the price of silver doubles over time and you sell it. It just so happens that the buyback price on American Eagle silver coins is higher, so that 9% advantage for silver bags gets eaten up a bit. But even when considering this impact, the 90% silver bags still win by over 6%. It's like an extra 6% in earnings for doing absolutely nothing (other than owning your silver in a different form.) What's not to love about that? And as Mr. Eberhardt points out, the 90% coins have the added advantage of likely being the type of coin used in barter if our monetary system ever deteriorated to the point of hyperinflation.

I've noted previously that I'm not a buyer of physical gold and silver at the moment for several reasons (top of the list is that they seem very expensive to me and likely to lose a good amount of their value in the next few years), but I find this conversation interesting. It peels back the curtain a bit on what seems to be a complicated buying and selling system that's tiled in favor of coin dealers. As such, I'll continue to post on buying and selling physical gold and silver when I find pieces that I think are especially enlightening.

Comments

[billyjobob]

I have a 10 oz Johnson Matthey bar from the 80's. I called 2 dealers about a month ago to see what they would give me for it. The spot price that day was around $30. One offered $250 and the other (out of GR) said they would give me spot price minus 13%. Only a little more than the other guy. When I got on the internet I found out that these bars are no longer made. I wonder if there is any more value since it is a 10 oz bar that can not be bought anymore? Anyone know much about this stuff?

[FMF]

billyjobob --

I suggest you contact Doug Eberhardt at http://buygoldandsilversafely.com/ . I'm sure he can help you and I've found him to be quite friendly and knowledgeable.

[billyjobob]

Thanks FMF.

[Rod Ferguson]

Or try APMEX; they are buying JM 10oz bars for $288.50, according to their website.

[Rod Ferguson]

FMF -

"It peels back the curtain a bit on what seems to be a complicated buying and selling system that's tiled in favor of coin dealers."

The same thing could be said for stocks:

"It peels back the curtain a bit on what seems to be a complicated buying and selling system that's tiled in favor of stock brokers."

True, some dealers do try to skin the client (as do some brokers or analysts), but PMs are like any other commodity. For the most part, it just looks that way if you don't understand it. For example: you go to a bar and order a beer. Do you think you are paying for that beer? No - you are paying to replace that beer, plus a bit of overhead to keep it chilled, a small part of the salary of the person serving it to you and some profit for the business owner. Think of a store-bought beer as the spot price of silver (and spot price isn't fixed - it's the difference between the highest bid and the lowest ask, and it changes constantly). Yes, you can buy your beer at the store at a lower price (and you can buy your silver from the COMEX at spot too). You usually can't buy a single beer at the store; you need to buy several at once (and the COMEX won't sell you a 10 ounce bar - it'll sell you a 10,000 ounce contract). Since the bar owner should be keeping track of beer prices, if they notice their distributor is raising prices, they'll in turn raise the price of beer sold... even if the inventory was purchased at a lower price (dealers will "lock" your price in regardless if it goes up or down from the moment of purchase because they are also "locking" the replacement costs at the moment of purchase). The bar owner adds a bit of profit to the cost of the beer - the dealer adds a percentage over spot as their profit. There is no analogy with beer on the buying side, so the example breaks down there. One of the reasons dealers buy under spot is that it's easy to lock a buy order with a warehouse, but it's harder to lock a sell order, as most will want to have the silver in hand before "locking" a price to prevent people from abandoning orders if the price rises above their sell. So, that bit under spot is loss management in the event they are left holding the bag with an order that can't be filled.

So, in the end, it's just like any other market with a few nuances (as all markets have).

[jim]

I'll have to ask my uncle what he did with all the silver he bought for $9 back in the 80's. I bet he sold it in the 90's for $5 or so.

billyjobob,
I don't think theres any special collector value of the 10 oz Johnson Matthey bars.
Theres several places on the net selling the 10 oz bars for a bit over spot.

[Harm]

The major advantage to coins, I'VE always thought, is that you could buy some
bread in case of a major economic
cataclysm, if a big meteor finally hits, or if the zombies invade, or any
reason we'd find ourselves in a Mad Max world.....
:P

[Concojones]

FMF,

RE "gold and silver seem very expensive to me":
Investing 101 - what is a fair price to you? ;-)

P.S. "silver bags" I'm guessing these are old American coins?

[Concojones]

Hint: are they HISTORICALLY expensive? Don't forget to adjust for inflation.

[FMF]

Concojones --

Yes, old American coins.

As far as "expensive", let's just say I think they are closer to their peak price than they are to where they'll be some time in the future. Add a bunch of fees to that, and it's something too pricey for me.

[Sunil from The Extra Money Blog]

expensive is of course relative. consider this - during the last big recession, gold was trading at a multiple of 6 of SP . . . if you do the math today, gold appears to be significantly undervalued. i've loaded on gold over the past 5 years, and will continue to dollar cost it at least through this year before reevaluating where i stand.

as far as silver, i started buying late in 2009. there were talks about increasing its industrial use, particularly in china where it was heavily regulated and not so much anymore, therefore every consumer item now is allowed silver incorporation because of its bling, glammour and durable quality. china is the biggest consumer society (in sheer numbers), and the consumption is now showing in the rapid increase in the price of silver.

[David]

The folks slavering over gold and silver these days seem to have forgotten the adage, "Buy low and sell high." Why buy now, when prices are so very high relative to 10 or 20 years ago? What will your metals be worth when the economy turns around and starts adding jobs? Will you be as comfortable with your metals in five years? 10 years?

Frankly, the stock market looks to be a better investment many times over. If it comes down to choosing between an ounce of silver versus a share in a well managed company with a competitive advantage and a healthy dividend, I'll pick the company's shares every time.

If someone wants to buy gold or silver to diversify their investments, that's their prerogative. But I could never see myself making precious metals worth more than 5% of my investments, especially at today's high prices.

[Concojones]

@FMF: here you're making a prediction. I thought your rationale for index investing was: never try to predict which investment will perform best. Isn't that what you're doing here right now? ;-)

@David: you're talking about "high prices", but up till a few months ago, silver was cheap in my book - and now it's still not expensive. Both gold and silver may get really cheap again - who knows (unlike you, FMF, I try not to time the markets :P). But if you haven't decided what "cheap" looks to you, oh well. Also, if your reference point is historical lows, everything will always be too expensive. Also, even if gold seems on the expensive side (it does to me), some of the juniors seem inexpensive to me (check out Jaguar Mining, for instance).

[FMF]

Concojones and Sunil --

Time will tell who is right on the price...

[Don from Personal eFinance]

The stage is set for silver to go up much more than it already has within the last month. Consider just some of the reasons: higher margin requirements, blatant shortages, JPM pulling back on their shorts, etc. A good alternative to physical metal (which is my favorite) is CEF.