Time to replace silver with gold?

How high a premium for silver bullion coins is too high?

I checked the APMEX website and discovered that with silver trading at an ask price of $16.09 per ounce on the day this column is being written one silver American Eagle bullion coin cost $22.68, a premium of $6.59, or almost 41 percent.

Demand for silver Eagle bullion coins has been smoking hot since the beginning of July. Bullion buyers have wanted more than the Mint can supply. This caused premiums that were already on the high side to move even higher.

In the few minutes I was watching the site, the price came down to $21.67 a coin with silver at $16.08, for a premium of $5.59 a coin, or 34.7 percent. That is the beauty of online action. You can see the market in real time.

Clearly, the market decided that a 41 percent premium was too high and prices adjusted themselves. But even at this lower level, the point is the price of getting immediate delivery silver too high and potential buyers should walk away.

At the same time buyers were being asked for $21.67, any sellers would be paid $17.98 a coin. The difference of $3.69 obviously helps provide the profit margin for the firm.

However for an owner of silver Eagles, it is money that just goes into thin air.

If you bought an Eagle and then immediately sold it, you would be out 17 percent.

On the other hand, if you wanted one gold American Eagle, the price you would pay would be $1,207.49 with gold at $1,150.20. The $56.99 premium works out here to just about 5 percent even. The APMEX buy-back price of $1,166.50, means if you had to turn right around and sell it, you would be out $40.99, or 3.4 percent.

This lower markup makes physical gold a relatively better bargain. Would it not make more sense to buy gold in this environment rather than silver? You would be seeing just 3.4 percent of your funds go up in thin air.

I am assuming that the motivational basis for making this kind of purchase is as an investment rather than as a collectible. Buying one of each date is defensible if it is purely to add to an ongoing set.

Gold and silver tend to have the same inflation hedge and hedge against disaster qualities.

I know I am making a wild leap here. Most collectors love silver more deeply than gold. They always have. Were it not so, premiums could not get this far out of whack.

I know telling silver Eagle buyers to buy gold instead is a bit like telling them to ditch their wives or grandchildren, but is it not better to put 96.6 cents of every dollar to work for yourself rather than 83 cents?

It is a purely rational calculation, but it is for the buyer’s own good.

• Purchase your copy of The Essential Guide to Investing in Precious Metals today to get started on making all the right investing decisions.
• Download The Metal Mania Seminar with David Harper to learn more about the metals market.