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High Silver Premiums Explained

By: Jason Hommel, Silver Stock Report

-- Posted 21 October, 2008 | | Discuss This Article - Comments: Source:

(Tulving did it again! )

Silver Stock Report

Tulving just bid $2/oz over spot for all 200 of my Engelhard bars in the live auction that closes on Wednesday, at NOON Pacific.  at

He's the top bidder for most of the bars, but not all of them.

Tulving also said he will bid up to $3/oz. over spot in the hour before the auction closes, when it's more firm that he'll know what spot prices will be at that time.  Just in case spot drops between now and then.

And, he wants me to publish his top bids!

In my last auction, that is now closed, Tulving bought 16 out of the 24 bags, for $149,055.08, which was for a total of 11440 ounces (16 x 715), which brought the "per oz." price to $13.03.  In the last hour before the auction close, the silver price hit $9.60.  Therefore, Tulving got the bags for under his bid price of "spot + $4/oz.", because he ended up paying $13.03 - $9.60 = $3.43 over spot, which was a premium of 35.7%.

That's how it works.  You pay less than you bid, most of the time, because of the incremental proxy bid system that automatically bids the smallest amount that you need to win.  So, essentially, the winning bidder pays a price of just over the second highest bidder.

Here's a picture of my 200 Engelhard bars for the current auction at 

Peter Spina, who owns has a message for my readers.  He's sorry that he is unable to accommodate those potential sellers who wish to participate immediately.  Due to his current operational staff size, he cannot afford to spend all his extra resources currently managing many listings for many sellers, many with smaller amounts to sell.  He plans to stage the growth as the size increases and keep focused on the software development, it requires close management, and time with new feature upgrades.  Peter also wants to prevent fraud from unknown sellers  so he needs to spend time screening upcoming new dealer participants to promote market integrity.  He will expand the site in time, on a sustainable, and profitable basis only, starting only with the major, well-known dealers who are in the process of joining this new silver and gold market.

So there is little to no reason for many people to need to sell on all right now when there remains other options.  Why bother, when you can just sell to Tulving directly?  Tulving's bids are very reasonable, again, higher than what I just got at auction!  And if you cannot sell in volume to meet Tulving's high minimums, then neither Tulving nor seekbullion can be bothered; that's what is for, the smaller amounts.

In fact, I would have made MORE MONEY just by selling to Tulving than by using the auction!  Get the point?  You are not missing out any if you can't sell at  Perhaps the auction software is more of a help to Tulving, than to me.  It is helping Tulving, and all of us, to validate Tulving's bid prices, which are right on the market, at the market!

As for me, this may be my last major auction.  I may continue to do smaller auctions.  Premiums seem to be dropping back from 50% over spot, back to 20-30% over spot, for Engelhard bars.  Maybe I swamped the market?

I'm beginning to be concerned about this auction.  I need at least about 18% premium to keep a product turnover going.  Why?  I pay shipping 4 times.  Here are my estimated costs, from good product to good product: 

1.  Shipping the nice bars to the customer, 1.5%.
2.  Paying the premium on replacement 1000 oz. bars, 6%.
3.  Paying the shipping of the heavy COMEX bars to a Mint, 1.8%.
4.  Paying the minting cost of 6%.
5.  Paying the return shipping cost of 1.3%.
6.  Paying employees to handle things: 2%.

That's a total of 18.6%, just to break even.  And that would not cover the risk.

And there's a lot of risk. 

1.  Default risk of customers not paying.  2 customers, or 5% did not pay in the first auction.  Life got in the way, as others defaulted on payment to them.
2.  Suppliers running out of 1000 oz. bars, which happened today.  (I bought their last five 1000 oz. bars, and seventeen bags of silver shot!)
3.  Loss in the mail, and the insurance not covering price movements to the upside, since I take mail risk at four stages.
4.  Potential default or delays from the Mint.
5.  Potential loss or theft from employees.

When you consider the costs, you have to really appreciate how good we had it when we were able to buy investable silver products, for years, at no more than an average of 7% over spot.  Prices got so low, only due to the public dumping silver for 15 years.  During that time, some called that an "excess", and other longer term investors such as myself, recognized it as an "unsustainable supply source" that was filling a deficit of mine supply.  That source has now dried up, since people are just not selling much, or any, to the dealers.

It's funny, the business lessons you learn from silver.  You learn that when American Steel companies complain about "dumping" from other nations who are more competitive, is a lame excuse.  Nobody in the silver trade would think to ask Congress to prevent people from "dumping" real silver.  We only complain when they sell fake paper silver!

Those days of low premiums are probably gone for good.  And you really have to wonder how people can operate a business selling new silver products for investors at 10% over spot, unless they are floating on customer money.

I know I could streamline with increased volumes, and pay shipping only twice, if I was a mint, or had one close by that I could drive to and from.  But that would reduce shipping costs only 3%. 

I could get another price break if I could buy 300,000 ounces at a time, to reduce the cost of the 1000 oz. bars from 6% down to 1.6%.  But then, capital costs would be significantly higher.  Also, perhaps dealing in those volumes would be enough to smash premiums, which would explain why it took premiums to go to this high for this long.  After all, this is a tiny market.  I just sold over 50,000 oz. of silver in a week, which would be a pace of 2.5 million ounces per year, which is about 1/38th of the overall investor's silver market of what I would estimate as 100 million ounces per year. 

Therefore, I strongly urge you to get these bars while you can, so close to what it costs, while they are still available. 

Silvertowne announced they are not taking any new orders.
The NorthWest Territorial mint announced they are not taking any new walk-in orders until they catch up on online orders.
The Perth Mint announced they are not taking any new orders.
The U.S. Mint is no longer selling silver Eagles.
The Sunshine mint, who is a supplier of blanks to the U.S. Mint is backlogged for 5 months.

Fortunately for silver buyers, if I reduce or stop selling silver at auction, there are others who can take my place.

I strongly recommend you look to and as outstanding suppliers of new silver, especially new 100 oz. bars, in addition to the usual great online suppliers, and  Hopefully, those four reliable major dealers will seek to list items at , just to keep up with free market prices, and to help them insure that they don't sell out at too low prices.

I also very much would like to show my appreciation to Tulving's bids of $3/oz. over spot for my premium brand Engelhard bars.  That's what he SELLS new bars for today, when he can get them.

Oh, one more thing.  All of this goes to show that the premiums are not the result of dealers withholding inventory because they bought at $20 and don't want to sell at a loss.  That's the investor's mindset.  A dealer deals.  Dealers deal!  All dealers, including me, will sell in an instant, if we can find replacement product, at lower prices.  In my case, since I have mail costs and manufacturing costs, because there is no old product to buy, it must be MUCH lower prices.  I just proved it, with the auctions!  If dealers are not selling, it's because they can't find more product to deal.  That just happened to me, as my supplier's supply of COMEX bars just ran out.  The other former usual supply source, the public selling, also dried up earlier this year.

So, to sum up.  The biggest reasons why product dried up, and premiums went so high, is that there was a confluence of several factors: 
1.  Major new public buying, starting when gold hit $1000, and silver hit $20 earlier in this year. 
2.  Existing dealers who are teetering on bankruptcy due to the rising market prices, lack of public selling, major increases in public buying, and changes in premiums.
3.  Low levels of regular new manufacturing, which was decimated by the former public selling, or "dumping" of real product.
4.  Manipulated low prices from futures contract selling that did not provide any new silver to the market, at "below" market prices, which used to come in from public selling.

All of this ought to give confidence to silver buyers today.  These are historic low prices for silver, even the premiums.  Premiums will not drop below 20% minimum until the public starts dumping, once again, and that probably won't take place until after a major price run up, at the end of this bull market in silver that ought to last about another 15 years.  And premiums need to maintain at about 30%, to encourage new manufacturing of new silver products.


    Jason Hommel

    -- Posted 21 October, 2008 | | Discuss This Article - Comments:

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