Increasing Capacity Problems in the Physical Silver Market

With the price of silver up almost 400 percent from where it was just under two years ago, there has been an enormous surge of people liquidating coins, ingots, sterling flatware, and other products. Since the demand from manufacturers of products that use silver is in either the form of pure 1,000-ounce bars or pure small spherical pellets, refiners need to melt down almost all of this silver to purify it and fabricate it into forms acceptable to meet demand.

In my column two weeks ago, I explained that so much silver is being shipped to refiners that backlogs in processing time have developed.

The backlog has gotten more extensive over the past two weeks. To try to maximize throughput, some refiners had halted processing any silver that was less than .999 fine. Even so, payment terms have slowed, where sellers could expect to receive payments 1-3 weeks slower than in normal markets. Two refiners this week told us that they foresee backlogs getting as long as 3-12 months to process sterling silver items.

At record-high silver prices, virtually all forms of bullion silver are trading wholesale below the commodity market spot price.  `

What all this means is that bullion wholesalers would have to finance the silver they are purchasing for longer periods than in normal markets. In reaction to this, there have been multiple actions taken to manage this strain on cash flow.

Early this week, three bullion wholesalers notified the company where I work that they were suspending all purchases of silver coins, bars, and scrap. As I type this on Wednesday, January 28, at least one of them has returned to purchasing .999 pure bars, Silver Eagles, and Canadian Silver Maple Leafs. Another wholesaler is currently only bidding to purchase Silver Eagles and Canadian Silver Maple Leafs. Two other wholesalers stated they would only send payment after they had checked in packages, where they were currently 4-6 weeks backlogged to process incoming packages.

Another wholesaler stated they would accept silver shipments but would not price and pay for them until they received the assay results from their refiner, several weeks delayed. A different bullion wholesaler said they could send out payment to dealers about two weeks after shipments arrived, but they would only confirm purchases of silver using a spot price about $10 below the commodity market price. One other wholesaler has imposed a combined daily limit on how much silver they will purchase from dealers.

This shutdown of liquidity in the silver market is leading many coin dealers to take different measures to manage the capacity strain. Some are halting the purchase of some or all forms of silver. Others are instituting limits on how much they will purchase from the public. Still others are closing their stores or offices one or more days each week. Some dealers are also widening their buy/sell spreads in self-defense. At least one national retailer is now only accepting purchases from customers selling a minimum of $10,000 of silver simply to cut down the number of transactions. Dealers have been whipsawed, where they are modifying their operations on a moment’s notice, sometimes more than once a day.

So many people are rushing to sell silver at today’s record high prices that coin dealers often have waiting lines of customers waiting to be served. The number of incoming phone calls to the company where I work has nearly doubled from what it was just a few months ago, which takes away from serving customers in the showroom.

In volatile markets such as those happening right now for silver, it is more important than ever to do comparison shopping to find the best deals, whether buying or selling. Be prepared to be patient. Even though this volatility has not yet impacted the gold, platinum, or palladium markets to the same extent, it is possible that capacity problems could develop for those metals as well.

At the peak of the 1979-1980 gold and silver boom, refiners were backlogged about six months. Only bars already in COMEX warehouses were worth the spot price. When silver’s prices reached $50 back then, the silver waiting six months to be refined into thousand-ounce bars to be put in COMEX warehouses was trading for about $35 per ounce.

This time around, the surge in silver’s price is heavily related to the shortage of physical metal needed by manufacturers. A much higher price cannot be cured by a quick surge in new mine output. Instead, such an increase is likely to take 5-15 years to overcome. The 1979-1980 silver boom was sparked by the Hunt brothers trying to corner that market in a financial squeeze and was ended when the COMEX changed its trading rules. Today, there simply isn’t enough physical silver inventory to halt prices from potentially reaching much higher prices in the near future. 

Last time I asked—Which living people were depicted on U.S. Fractional Currency that was placed into circulation? There were three. Spencer M. Clark, superintendent of the First Issue of the National Currency Bureau, placed his own portrait on the 5-cent denomination of the third issue of Fractional Currency. Francis E. Spinner, Treasurer of the United States from 1861 to 1875 and also creator of the Fractional Currency issues, appears on the 50-cent denomination of the third issue. William P. Fessenden, Secretary of the Treasury from 1864 to 1865, appears on the 25-cent denomination of the third issue. The controversy over living individuals appearing on U.S. currency led to legislation in 1866 prohibiting this practice. A proposed 15-cent Fractional Currency issue depicting living Ulysses Grant and William Tecumseh Sherman had already been printed in specimen form. But when the 1866 law was passed, this note did not go into production for circulation.

Here is this week’s question. Who was nominated to serve as the next U.S. Secretary of the Treasury at a time when the price of gold was $280 per ounce, which fell to $225 per ounce when he took office? Come back next week for the answer.

You may also like:

Is Silver Reshaping the Future of U.S. Coin Collecting?

Physical Gold and Silver Promote Peace

Price Volatility and Capacity Problems with Precious Metals and Numismatics