Recent trends in silver coin premiums have shown some rather disturbing similarities to the 2007-2008 period and, while this doesn't necessarily mean that the months ahead will bring another financial crisis, it's still worthy of note.
After a record surge in silver coin sales at the U.S. Mint during the first two months of the year, there have been many reports of rising coin premiums and it seemed a review of the historical relationship between spot silver and silver coins was worth a fresh look.
Recall that spot silver prices are set in futures markets whereas silver coin prices are primarily set by coin dealers operating in local markets all around the country.
As such, while there is a very clear price for silver futures and exchange traded products such as the iShares Silver Trust (NYSEARCA:SLV), coin prices vary depending upon where you live and the relative supply and demand in your area.
Silver dealers with a national reach are less affected by local market conditions, but they too have seen rising silver coin premiums, the latest evidence of such coming from USAGold in an email yesterday:
Greetings clients and friends,
Supply shortages continue in the physical silver market. Junk silver bags ($1000 face value combinations of silver quarters, dimes and half dollars) have all but disappeared. What was once the 'cheap way' to buy bulk silver has seen premiums jump to over 10% over melt. Meanwhile, the U.S. mint is rationing silver Eagles, pushing delivery times out to a month+ for all orders...
Anyone who was following the precious metals market five or six years ago will remember that, in the run up to the 2008 financial crisis, premiums for gold and silver bullion surged.
The reason was simple - people could see that something bad was coming and they took steps to protect themselves from a worst-case scenario. This resulted in a surge in demand along with a dearth of sellers and coin dealers raised their prices relative to the spot price in response.
As shown below, after tracking other silver prices closely in 2006 (as they had done for many years), coin premiums first began to rise in 2007. Then, in 2008, coin prices completely disconnected from futures market pricing with a stunning 15 percentage point difference between the two as spot silver fell about 25 percent while silver coin prices fell just 10 percent.
[Note: The silver coin price data above is from California Numismatic Investments, one of the largest coin dealer in Southern California, for pre-1965 90% silver coins with a face value of $1000 (also known as "junk silver") . As noted above, coin prices across the country vary, but, due to their high volume and long presence in the market, I believe CNI prices to be representative of national trends.]
As expected, by the end of 2009, the increase in silver coin premiums that developed in 2007 and 2008 reversed and, for the next two years, the relationship between silver coins and silver futures was steady.
Late last year, silver coin premiums began to rise again and, for all of 2012, junk silver about doubled the price gains seen for other forms of silver - up 16 percent versus a gain of about 8 percent.
So far this year, the price of silver coins at CNI has dipped about one percent while other silver prices have dropped between four and six percent, meaning that the coin premiums continue to rise.
What does all this mean?
It's important to remember that rising silver coin premiums do not necessarily mean that there is a silver shortage. As was the case five or six years ago, there is now a supply-demand mismatch for a particular form of silver and this is what's driving the price of silver coins higher relative to other forms of silver.
Moreover, the same increase in premiums has not shown up in 100 ounce silver bars, which is another popular form of silver bullion. And, to the extent that the Sprott Physical Silver Trust (NYSEARCA:PSLV) also represents physical demand, it's worth noting that, per the company's website, premiums there have yet to rise from the 1-3 percent range where they have been for many months now.
Nonetheless, recently rising silver coin premiums are clearly signaling unease amongst some portion of the investing public who have decided to buy silver coins at a much faster pace in recent months - as they did back five or six years ago.
We'll find out soon enough if this development is foreshadowing events similar to what was seen in 2008.
Ironically, if it is, silver coin buyers might be better off buying gold coins than silver.
Recall that gold was one of the few assets to post a gain in 2008 as it served as a safe haven while silver and just about every other commodity and stock plunged in price.
That fact is worth remembering if silver coin premiums continue to rise and financial markets begin to look shaky in the months ahead.
Disclosure: I am long SLV, PSLV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I also own silver coins and bars.