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It's Time to Be Extra Careful

In volatile markets, it is even more important to be careful beyond the normal prudent due diligence.
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In the past week, there has been great volatility in the silver market. Some people who made outsize profits taking on the hedge funds who have sold short huge positions in selected publicly held stocks were looking for other assets to repeat the process. The silver market is definitely one with huge short positions, and some of these investors and speculators started to buy physical and paper forms of silver.

The surge in buying demand definitely had a short-term impact on the silver market. From the COMEX silver close on Wednesday, Jan. 27, at $25.42 to its close on Monday, Feb. 1, at $29.40, an increase of more than 15.6 percent. That was the highest COMEX silver close since it was $29.41 on Feb. 19, 2013.

As the surge was developing, I sent out a special alert last Friday warning that the tactic of trying to bully the companies with large short positions in the paper silver market would not work as well as it did in the stock market. The reason for that is that the U.S. government and its allies with “all the money in the world” would be the ultimate backstop to protect the short sellers of gold and silver.

On Monday afternoon this week, the COMEX raised margin requirements for leveraged silver contracts from $14,000 to $16,500, an 18 percent increase. That brought on the expected result that many owners of leveraged COMEX silver contracts were closed out the next day, forcing prices most of the way back down.

As the buying surge got underway, coin and precious metals dealers ran out of stock of a wide range of products for immediate delivery. Even wholesalers, the mints, and the private bar manufacturers could not keep up with demand. Consequently, retail premiums for bullion-priced silver coins and bars rose by more than the spot price increase.

Delivery times are also stretching out further into the future. One wholesaler told us this afternoon that they do not expect the U.S. Mint to catch up to demand until maybe June.

In volatile markets, it is even more important to be careful beyond the normal prudent due diligence. When many first-time buyers enter a market, that tends to draw more scam artists to try to take advantage of them. Even if you avoid such crooks, here are a few tips to help you make sure you get your merchandise at a competitive price.

  • Get delivery of your physical metal. Over the years, some dealers have encouraged their customers to leave their precious metals stored with the dealership as a way to save storage fees charged elsewhere. Several such companies have then gone bankrupt and left their customers holding an empty bag—including more than one for whom I had a high regard. Be especially careful now if a dealer who is having difficulty obtaining coins and bars suddenly offers this option. You may want to avoid them altogether.
  • Be more diligent in your comparison shopping. On Wednesday afternoon this week we learned that a prominent national coin and bullion dealer was quoting a price that was 26 percent higher than the company where I work for a $1,000 face value bag of U.S. 90 percent silver coins, and that the company promised to ship the coins in one to two weeks where my company had product available for immediate delivery. Almost always this company’s price had been very close to the same as ours. Just because a dealer may have been competitive in the past does not mean they still the best place to go now on every product.
  • As I have warned in the past, those who own “paper” precious metals are at risk of perhaps finding that in turbulent markets they don’t own gold or silver at all, just paper. Just ask those who had supposedly secure “allocated” precious metals stored with MF Global when it went bankrupt in October 2011. Potentially risky forms of paper silver could include commodity futures contracts, options, share in precious metals exchange traded funds, and the like.
  • If a deal sounds too good to be true, it probably is.

Even though the spot price of silver has returned with its recent trading range, physical silver prices are still higher because of the higher premiums. I have paying high premiums for bullion products because it is not likely that this premium will be applicable when it’s time to sell. Still, since I expect significantly higher gold and silver prices by the end of 2021, it could still be a good time to buy. If you do so, just be sure to be extra careful.

Follow-up on surging Morgan and Peace Dollar prices:

In last week’s column I described how prices of circulated common-date Morgan and Peace dollars had increased significantly in anticipation of the forthcoming release of the 2021-dated Morgan and Peace silver dollars. I suggested watching this market for the best time to consider selling any of these coins you may have.

Over the past week, wholesale bids for these coins are up another 5-10 percent. Once the U.S. Mint announces the release date for the new coins, the possibly best time to cash out the older coins might be one to two months before the new coins come out.

Patrick A. Heller was honored as a 2019 FUN Numismatic Ambassador. He is also the recipient of the American Numismatic Association 2018 Glenn Smedley Memorial Service Award, 2017 Exemplary Service Award, 2012 Harry Forman National Dealer of the Year Award and 2008 Presidential Award. Over the years, he has also been honored by the Numismatic Literary Guild (including twice in 2020), Professional Numismatists Guild, Industry Council for Tangible Assets and the Michigan State Numismatic Society. He is the communications officer of Liberty Coin Service in Lansing, Mich., and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at www.libertycoinservice.com. Some of his radio commentaries titled “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio archives posted at www.1320wils.com).