Coins vs. Bags: Comparing Two Options in Physical Silver

Dec.29.10 | About: iShares Silver (SLV)

Financial advisors always compare the advantages of one stock, ETF or mutual fund over another and write articles explaining their position. Gold dealers are no different. It’s important to understand the advantages and disadvantages of each type of metal you purchase before making the decision to buy.

Add to this the fact that the price of silver has risen remarkably in the past few years and investors are wondering the best way to take advantage of this price movement.

For this analysis, I have left out any comparisons to silver bars, as I believe investors should own silver coins as a basis for their portfolio. Silver coins, as will be explained later in the article, can provide the means of profit as well as be used for barter should the economy slip to those depths in the future.

39 Million Silver Eagle Coins Bought in 2010

Many people want to buy the one-ounce American Eagle Silver bullion coins, but for the life of me I can’t figure out why they want to pay such a high premium for owning them. Yet U.S. Mint sales figures show they have already sold over 39 million one-ounce Silver American Eagle coins in 2010, surpassing 2009 sales by over 11 million and 2008 sales by 20 million.

In my book Buy Gold and Silver Safely, I go into detail about the advantages and disadvantages of owning various gold and silver bullion coins and bars. I point out that when investing in silver, there is one clear winner for coins: 90% silver bags. This may come as a surprise to those who bought one-ounce Silver American Eagles ... although the Silver Eagles sure are beautiful coins.

You Want the Most Silver for Your Money

When making a decision to buy silver, you want to purchase the most silver for your money. This means that you want to buy silver as close to the spot price as possible. For new investors, the “spot price” is simply what the price of silver is at any given moment in time, as priced on the exchange. You want to buy silver as close to this price as possible, taking into account there will be fees paid to the dealer for acquiring the silver (shipping, handling, commissions to dealer).

The problem is that not all silver purchases are alike. With certain types of silver coins, you have to pay more to acquire them. The question I ask of buyers is, Why would you want to pay more? Isn’t the goal of acquiring silver to obtain as much as possible of the metal for your Federal Reserve Notes?

The best thing to do is to compare the pricing of the two most popular silver coins side by side.

Comparing Pricing of the Two Most Popular Silver Coins Paints a Clear Winner

The most popular silver coins are the one-ounce American Eagle bullion silver coins and the 90% silver bags of pre-1964 silver quarters and dimes. The 90% silver bags have a face amount (value of the quarters and dimes) of $1,000 and contain 715 ounces of silver.

The following table shows the extra premium one pays to acquire American Eagle bullion silver coins through most any gold dealer. I use an investment of $100,000 and show the additional ounces of silver that can be obtained by buying 90% silver bags instead of one-ounce Silver American Eagle coins with this amount.

*This price is currently under spot price

** Note: The dealer commissions would be added to the price. These fees can rage from 1% to 10% or more, depending on which dealer you speak to.

The Buyback on American Eagle Silver Coins Is Higher Than Spot; However …

What’s interesting is that as of today, the buy-back price on one-ounce American Eagle Silver coins is higher than spot. However, the overall advantage to 90% silver bags is in the fact that you can acquire 282 more ounces of silver that can go to work for you as seen in the following table:

(This table shows liquidation proceeds and pricing assuming the price of silver doubled in the years to come with American Eagle one-ounce silver coins and 90% Silver Bags.)

Wouldn’t you prefer to have that extra $6,000 in your pocket? If so, then the 90% silver bags are a superior investment to one-ounce American Eagle Silver coins.

Gold Dealers Need to Do What’s in the Best Interest of Their Client

Why aren’t other gold dealers directing clients to what makes the most sense? Sure, a good “salesman” listens to the prospect and then gives him what he wants, just to make a sale. But every person who calls into a company that wants to buy silver should be educated on what makes the most financial sense. If they still want to buy the one-ounce American Eagle Silver coins, then at least they have heard what makes more sense for their portfolio first.

There Are More Reasons That 90% Silver Bag Coins Make Sense

The 90% Silver Bags consist of coins -- dimes and quarters -- that were once used as money in the United States. In 1964, one could take a dime to the store and buy a loaf of bread (if you are old enough to remember). Today, that same 90% silver dime is worth $2.10, enough to buy a loaf of bread.

These American coins would become the type of coin used in barter if our monetary system ever deteriorated to the point of hyperinflation. It wouldn’t hurt one’s portfolio to pick up a bag or two at a minimum for this reason. At least you’ll know your dime can still get you some bread … unlike the dimes printed by the U.S. Mint today.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Long Physical Gold and Silver Bullion