Quote:
Originally Posted by Klunky  Silver is silver right? |
If you are looking to begin investing or speculating on silver, you need to permanently remove that idea from your thinking. There are many market aspects regarding silver.
The first thing to consider is "spot rate". Spot rate is simply the bid for delivery "on the spot". This is true whether you are talking precious metals, food commodities, foreign exchange, or any other form of commodity.
The second consideration is the "market" that you are obtaining the spot from. I will over-simplify things for understanding's sake. There are a number of different and diverse markets. And within each type of market, you have various exchanges. In talking about silver, the most prevalent market is the contract market. We are familiar with the contract market through the
New York Mercantile Exchange.
These contracts are what I refer to as "paper silver". "Paper silver" is a promissory to deliver the specified amount of silver at a specified maturity, or date. Frequently, these contracts may be bought back, in which case no physical silver ever exchanges hands.
The spot price is determined by the Over-the counter (OTC) market, which may also include matured contract buy backs. Silver traded over-the-counter are traded in bulk with immediate physical delivery (up to two days on the London OTC), and usually overseen by what can only be called a cartel.
Now, consider the situation so far. The "spot price" is a price for bulk silver trading on the spot, affected by investor speculation and future expectation, which is overseen by a trade cartel (for the London Exchange: the London Bullion Market Association, who are themselves overseen by the Bank of England).
Thus, the "spot price" really does not have quite the same effect on a market that is neither the "paper silver" market, nor the "official" OTC market.
The market you are looking to participate in is quite different indeed. I would refer to this market as a "peer market". This is a low volume, demand and deliver, peer to peer market based solely on supply and demand (unlike the "paper" and OTC markets).
Now do not get me wrong. I am not saying that "spot" has no bearing on our particular market. It is most definitely used as a guide, because our governments who are producing the silver products we use in our peer market utilize the OTC market to obtain (or reduce) the amounts of silver available to them for such purposes.
But, the pure economic basis of supply and demand have a much greater affect on the peer market than it does the "paper", or even OTC, market. This should help you to understand why there is a premium on silver content coins to begin with.
At this time, coin silver (90% pure silver coin) is trading at an ask of approximately $15 per ounce, while the OTC "spot" rate is under $12 per ounce. The reason for this is demand. Because of a high demand for no- to low-bulk silver, those who physically have the silver available are able to seek a higher ask price.
Now, you did notice that there were premium differences between the 90% and 40% silver content coins. As well, you noticed that the silver nickels were even UNDER spot.
First thing to consider is who your peers in this market are. You not only have speculators looking to obtain low-bulk amounts of silver to spread to those trying to "hedge against inflation" (which is a myth, but we won't go into that for this post), but also those who would use the actual silver in commercial production (jewelers, pharmaceuticals, photography, etc.), as well as bulk coin searchers trying their luck at that rare find, and even to other speculators and investors.
This is where the difference in premiums comes from. Like I had said, there are a number of commercial uses for coin silver. But, in order to use the silver in the coins, the silver needs to be purified. It is quite a less expensive process to purify metal that is already 90% pure as opposed to metal that is only 40% or even 30% pure.
Because there is definite demand, and it is cheaper to process higher quality silver, the 90% holds a much higher premium to 40% or lower fineness. For anybody to obtain "on the spot" silver at the prices published by the exchanges, you would have to do so in bulk quantities that are far more than any jeweler will ever need.
I hope this helps a little in understanding more about "junk" silver prices and why things just do not seem to be matching up to the "spot" pricing. "Spot" prices simply are in a completely different market than the one most of us deal in.
Well, at least with most of my auctions I start them at a penny... so the price goes to what people are willing to pay... seems fair to me.
Hybrid Mode
