Extreme Product Premiums Explained



Extreme Product Premiums Explained

Extreme Product Premiums Explained

I’ve seen things this week that I’ve never seen in my 10+ years in the precious metals business. Things that have left me scratching my head. Indicators that something just isn’t right.

  • Premiums for 1 oz Silver Maple Leaf coins have reached a high of $5 USD per ounce over spot. For the retail buyer that equates to a 35% product premium above the spot price of silver, nearly double the normal premium for silver coins.
  • Primary wholesalers are accepting orders for delivery 8-10 weeks out.
  • The cost-per-ounce on recognized 100 oz silver bars is higher than that of unrecognized 1 oz silver bars.

These things just don’t add up. I tell myself that I must investigate. I call a friend who works at the trade desk of one of the largest retailers in North America. Generally he can quote me a premium for any mainstream product at the snap of my fingers, but today he asks for time and has to call me back. 15 minutes later, he has found some Silver Maple Leafs and is happy to wholesale them to me for $4/oz over spot. Thanks, but no thanks.

My friends from 321Gold call me a few minutes later. We get to talking about the ridiculous premiums we’re seeing in the market. Bob tells me it’s all about hedging, or lack thereof; small dealers holding inventory they purchased prior to the price drops and now trying to cover their losses. Feasible I agree, but I’m still not satisfied.

I email my mentor, a seasoned trader who’s been in the metals game since the late 1970s. He now acts as Trading Director for a major retailer and approved distributor of the Royal Canadian Mint. Surely he’ll be able to provide some insight. I ask him what’s going on. How it is that Silver Maples Leafs cost $5 USD over spot? Are the mints inflating their premiums that dramatically?

The answer is NO. The mints are not responsible for the ever increasing premiums we’re seeing (and paying). Their weekly allocations remain the same (or higher) than they have been for the last few years and the cost out-of-the-door for their product to their approved distributors remains the same as it always has. So where are these massively inflated premiums coming from?

The answer starts with record levels of investor demand for physical silver product. Seeing that demand is currently so high, unsatisfied by the regular allocations produced by the mints, large retailers who are feeding this product frenzy have so many buyers lining up at their doors (or visiting their e-commerce websites), that they can increase their premiums almost daily, and still sell out of product. Even though their cost at source remains the same, why sell a Silver Maple Leaf coin for $3 over spot to Joe, when Steve, Larry and Michael are willing to pay you $4, $4.50 and $5 respectively?

Ok fair enough, so wholesalers and retailers are cashing in handsomely, and retail investors are footing the bill. But there’s more. Some products are currently so hot, that as I eluded to in my intro, wholesalers are excepting orders for delivery 10 weeks out. That means they are selling products at today’s high premiums that haven’t even entered the production lines at the various mints yet, therefor, if investor demand stays where it is (or god forbid increases) we could see silver products carrying premiums in excess of 40-50% in the coming weeks.

So what can be done? Because frankly, paying a 35% premium for any commodity is not advisable. Consider alternatives, such as the Sunshine Mint or secondary sovereign mints such as the British Royal Mint (which produces the Britannia) or the Austrian Mint (which produces the brilliant Philharmonic). Because these products are lesser known and generally in lesser demand, they should be more reasonably priced. Also, consider gold at times like this. The yellow metal carries lower premiums than silver and is more readily available for purchase. Lastly, ask your dealer for any products they have on clearance. There’s always something inside the vault that needs to move, but that may not be the case for very long!

Good luck out there. Enjoy the ride, but remember to wear your safety belt.

*****

Mark Yaxley is the head of Operations & Client Services for Strategic Wealth Preservation (SWP). He first began working with gold and silver at the age of 26, when he joined Kitco Metals. There, he specialized in product development and served as Kitco’s Product Marketing Manager. A decade later, he joined SWP, a Cayman Islands based company that specializes in the acquisition and storage of gold and silver bullion, including IRA holdings. He can be reached for comment at my@swpcayman.com.



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