-- Posted 6 October, 2010 | | Discuss This Article - Comments:

The US Mint is acting quickly to reduce extreme demand for American Silver Eagles.  Just this week, the Mint declared that it would raise dealer premiums from $1.50 per ounce to $2.00, squeezing profit margins on the coins for dealers and making physical metals far more expensive than the spot price.

Prices Change Globally

Within hours of the announcement, prices for American Silver Eagles around the world jumped $.50 as dealers prepared to pay higher prices for future silver supplies. 

Similar to how gas stations raise prices before a change at the wholesale level, or how cigarette prices rise before a new tax, dealers have to allow the new price changes to set in before they actually do.  In marketing, we'd call this “anchoring,” or setting a new default price before a change to help ease the pain before consumers go to buy their next round of a certain product, or in this case, silver.

The move from $1.50 over spot to $2.00 over spot is an effective nominal increase of 2.5% over spot metals prices.  When silver is $22 at spot, dealers will pay $24.00, and the end consumer or investor should expect to pay another dollar over the wholesale price for a total price of $25.00.  All told, a $1000 investment would only buy $880 of silver spot, a very high premium!

Unfortunately, the new premiums are starting to move into other coins, namely foreign sovereigns, where the price has risen to reflect a new guaranteed premium by the US Mint.  At the time of writing, American Silver Eagles were selling at the near minimum price point of $25 per round, whereas Canadian Maple Leafs earned a similar price of $24.90.

Whether or not these new premiums will continue in the foreign sovereign market remains to be seen, however, dealers are apparently not having any problems making sales at a price 13.6% higher than spot.

Better Deals Elsewhere

Luckily for investors, some bargains still exist in junk metals and for silver bars.  Premiums for these products have barely budged, with silver bars trading for just a fraction of a dollar over the spot metals' price. 

Junk metals, by contrast, are trading at prices near or just a few pennies above spot price, as dealers look to reduce their holdings as silver makes new highs.  The profit motive for dealers in junk silver is largely in appreciation and shipping premiums, where they make most of their profit. 

Thankfully, silver prices soared in September, and dealers are locking in their profits by deeply “discounting” hordes of junk metals against American Silver Eagles and foreign sovereigns.

Dr. Jeffrey Lewis

www.silver-coin-investor.com