Please Explain The Theory Behind Melting Silver Coins

Why are costs incurred to melt common silver coins in order to make bullion worth only silver value, when if left a coin it has a value slightly above or the same as melt? Are silver coins really melted or is it just the dealers’ way of low balling purchases of them?

 

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Because the refiner will pay close to spot and if the coins were obtained at face, or at least bullion value from an earlier date, there is profit to be made.

Yup.

 

Even so, since there are costs associated with refining and since common silver coins will sell at premiums above melt, it should be more profitable to sell them as coins, regardless of what was paid for them.

 

This doesn't answer your question but I think many dealers don't actually melt a large number of coins they buy.

For example...

Local dealers here will pay $1 for a basic silver dime Roosevelt/Mercury and the melt value is currently $1.31. Two of the three shops I deal with would likely drop those coins into a container of dimes from which a customer can search through for $2 or $2.50 each. As long as the date and mintmark are visable I don't think they would melt them down.

 

This is true if and only if I can find enough collectors who want to buy one for their collection at that premium over spot. If I've got 500 1964-D dimes it would take me years to find 500 collectors who need one for their collection. In the meantime my capital is tied up in a non-performing asset and I am LOSING money the whole time I am holding them due to the time value of money plus the fact i don't have my capital available to use on more lucrative deals. A dealer makes money by keeping his money turning. It makes much more economic sense to buy and sell repeatedly for a small markup than the buy and hold for a long time for a larger return. So if he can't more them quickly to a collector, or to a silver speculator, they head for the smelter. Keep it turning, keep it turning, keep it turning.

 

Makes sense if you don't have at least silver speculators to purchase them. But isn't there a huge market (especially with sites like eBay) to dump silver coins at close to bullion prices? Just seems like holding silver coins would be the preferred method over bars to hold silver due to potential for numismatic appreciation and less cost to bring them to market. Case in point is all the 1960's choice to gem bu's I bought as bullion years ago, now have a significant premium over bullion value.

So, unless there is significant demand for silver bars over coins, and there may be even though it makes no sense, hasn't the industry created an unnecessary and costly step to refine a coin that was worth more before it was refined?

Of course, I can see where dumping coins on sites like eBay may cause longer wait times for the cash. But are refiners really quicker to pay, what is the turn around time? And, if it's faster, is it worth it based on the larger amount one could get for the coins from those that want to hold silver as coins?

 

At the coin show in San Diego last weekend, one seller had bags of $250 face silver dimes ( all I could see were Roosevelts). They weren't moving nearly as fast as ASE and 10oz silver bars. IMO.

 

$250 face is a lotta cash, though. At least $3k. Bet if he broke those bags down into $50 face and sold them, he'd have more luck...

 

Great responses!

You have to remember that most people are not coin collectors. To them there is no numismatic premium. They would much rather just have a silver bar instead of a bag full of dimes.

 

Good points, I can see there's demand for silver bars. But, on the other side, the supply, are coin dealers/collectors actually making more by selling to refiners or would they be better off selling to coin/bullion investors? I know many "non-collectors" know and value silver coins, so why do some prefer bars? Is it because that's what's been marketed to them, even though they'd be better off holding silver coins? Are bars priced closer to spot, making the buyer believe they’re getting more bang for the buck? Due to coin designs, do silver bullion coins have the stigma of being the same coins found in circulation, thus making bars appear more unique/valuable, the way silver should look?

 

In most circumstances US coin silver is not refined - it is melted as is with pure refined metals added to the melt to produce the desired alloy.

 

Another aspect to "refining fees" to remember is that the silver value of coins is calculated from the day they are minted. Circulated coins by definition have less weight, therefor less silver. Part of what they calculate as refining fees is really a fudge number for the loss of weight for circulated coins as well. Weigh a well worn coin versus a MS coin and you will see the difference. Multiply the difference times hundreds or thousands and you can see the weight loss adds up quickly. There were even instances of "shavers" in US history, though less than in ancient times. But, if you worked at a bank or had access to large numbers of coins passing through your hands, rotating the edging over a sharp knife could net you an ounce or two of free silver in time. This is also circulated coin weight loss.

However, the biggest difference like GDJMSP stated is dealers have to have buy/sell spreads to stay in business and provide the hobby with liquidity.

 

Sure, I understand the spread between buy and sell and you say it's even more pronounced with coins (because of refining costs, which are unnecessary). So, regardless of whether or not the dealer is going to sell to a refiner or resell the coins, doesn't the dealer pay the same price to the person walking in off the street with silver coins? Now, if that's true, can't the dealer make more by selling them as coins, rather than to a refiner? For large quantities, the dealer can dump them on eBay, etc. As a buyer of silver and knowing the value of a coin over a lump of silver, wouldn't I do better by holding silver coins, as I did with my previous example with the choice and gem bu 60’s bullion coins?

 

tsk tak what of all those numismatic coins that we have bought below melt. now u are going to say we r exceptions?

 

True as of the date the coins are sold as junk silver, however, I'd argue that they have some minimal numismatic value by their nature of being a coin, unless they are damaged. Now, down the road, holding silver coins presents the opportunity to gain (or lose) due to their silver content and their numismatic value.

So, the point to this thread is, why incur additional cost to melt/refine a coin, when one is probably better off holding silver as coins due to the added potential for numismatic gains.