20 May 2009

Silver premiums and fake spots

Interesting resurrection of a Kitco post from October 2008 about silver premiums. There was a lot of heated words and a bit of sillyness. In October 1000 oz bars were quoted @ 69 cents and 1 oz Eagles @ $6.99. Now it is 19 cents and $1.99.

For those who would only trust physical, the smart play was 1000oz bars @ 69c. I'm not sure what the buyback discount is in the US, lets say 1% under the so-called "fake" spot. So sell the 1000oz bar and lose 15c and then buy Eagles at $1.99. Total cost = 69c + 15c + 1.99 = $2.83, still way cheaper than $6.99.

Also, reading back over those posts there seemed to be a view that there was a difference between "industrial" silver (1000oz bars) and "investor" silver (1oz coins). In the Perth Mint's Depository by far the most popular physical form held in allocated storage by individual investors is the 1000oz bar, not coins, simply because it is the cheapest. From my point of view a 1000oz bar IS and investor product.

As to the view that COMEX is some sort of "paper" price "disconnected" from the "real" physical price. Arbitrage in the professional market keeps COMEX price in line with spot price for physical. The fact is that huge quantities of 1000oz physical silver bars change hands at this "fake" spot price.

It is interesting that commentators who were making a huge deal about the big premiums on coins and using this as proof of the fakeness of COMEX and that it meant the end of the world and silver was going to the moon etc etc are now very quiet about the reduction in premiums. If the low premiums are mentioned, it is as an aside and no conclusions are drawn. They really shouldn't have been making a case for investment in silver based on premiums (as that just reflects manufacturing capacity shortages) but on the spot price (which reflects real shortages of the underlying physical).

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