Metal Premiums Show Physical Metal Demand

Includes: GLD, SLV
by: Simple Qualitative

This morning I decided to visit one of my longtime favorite large coin and bullion dealers before heading out to California for the summer. This place has been one my go to shop for years, because they have consistently offered great prices on everything from American Eagles, Bars, Rounds, and 90% coin lots. I have always taken a portion of my income every month an invested it into my portfolio of stocks, bonds, and precious metals. Today, I went in to load up on precious metals, as over the last couple months, I stopped my purchases as I waited for the prices to stabilize.

Unfortunately, when I asked for quotes, I was immediately turned off by the premiums. Last time I bought from the shop, the price of silver (NYSEARCA:SLV) was around $30 per ounce and gold (NYSEARCA:GLD) traded around $1560 per ounce. The silver premiums were as follows: American Eagles were $2.75 over per ounce, Miscellaneous 1 ounce products were $2.00 over per ounce, and lastly 90% coins sold for 20 times face. Today, the premium of American Eagles rose 81% to $5 per coin, the shop was sold out of all its 1 ounce products, and the 90% coins were still selling at 20 times face even with the steep drop in the price of silver.

When asked about the rise in premiums, the shop's owners responded by saying lately there has been a huge rise in the demand for its silver products. Any entry level economics student knows when the demand rises with constant supply the price rises. However, the price of silver has fallen dramatically hasn't it? Shouldn't that mean the demand for silver has fallen? The demand for physical silver has risen dramatically and so have the physical premiums as retail investors demand precious metals. Most retail investors can't get out there and buy silver futures and must resort to buying relatively small amounts of physical when they can afford it. When I then asked the owner about the missing miscellaneous round, he stated he's been buying less and less as the prices have fallen and it's unfortunate as he has customers coming in every day to check the availability of these products. Wait, so the supply is actually shrinking with rising demand, isn't this perfect case for higher prices?

The real demand for physical silver can be seen outside just this average coin shop. The highly reported U.S. Mint shortages are just another example of the divergence in demand between the physical and paper precious metal markets. The silver and gold bullion markets are about as perfectly competitive as you can get, meaning the prices charged for metal products should be very similar though out most areas. Being a perfectly competitive market, I expect many other local and online dealers have experienced similar demand increases and raised premiums as a result.


On the weekly, it looks like the SLV should find support around $19 as previously shares hit resistance at this level and are now effectively support. The relative strength indicator sits around 25 signally we are currently at oversold levels. It looks like further downside is limited at this point in time.


Paper markets and physical markets have diverged significantly as the prices of precious metals have fallen. The increased demand for physical products can be seen in the rising premiums for these products. I believe the paper prices should be supported somewhat at these levels as a result of the rising physical premiums. I am not a conspiracy theorist or doomsday nut, just a regular investor noting my observations this weekend.

Disclosure: I am long gold and silver through physical bullion. I am long the SLV through call options. 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.