It was reported that the U.S. Mint temporarily sold out of its American Eagle silver coins last Tuesday. The U.S. Mint is continuing its production of the coins and expects to resume selling them in the next couple of weeks.
This is all happening in the face of a declining price for silver. In a certain way, it makes sense because when the price of something drops, more is demanded. But if we are following rational economics, if the demand is increasing and the supply is running low, then prices should go up.
The U.S. Mint doesn’t sell silver coins or any other metal at some set price. It uses market prices.
There is obviously a disconnect here between the market price of silver and the price of the silver coins being sold by the Mint. It’s not to say that the prices are different, but just that it does not seem to be reflecting the same supply and demand.
So what is going on here?
We have to consider that the paper market for silver (and this would include other commodities too) is far bigger than the physical market. In other words, most of the transactions in buying and selling silver are done through trading where actual silver is not changing hands.
The futures market is obviously the key player. Investors will buy and sell silver through the use of futures and options.
We also have to consider exchange-traded funds such as SLV. It is a way for people to own shares of silver without actually having to take possession of it.
With the Mint running out of silver, it means that the paper market is overwhelming the physical market in the short run.
So what will all of this mean for the silver market in the near future?
Physical Demand Always Wins in the End
If there is a disconnect between the physical market and the paper market, where there is more demand in the physical market, then this is going to self correct at some point. It will probably happen sooner rather than later.
Before you back up the truck and start loading up the silver, consider that it can go both ways. Perhaps the paper market is right and the demand for silver coins from the Mint is just a blip. It is possible that the next batch of silver coins at the Mint just sit there for a while without a lot being sold.
In these situations, I do tend to trust the physical market better. The speculators are trying to make a quick buck, and they are frequently using high leverage to benefit, at least when they are correct. Many of these traders are in and out of positions quickly.
When someone buys silver coins from the Mint, even if it is a coin dealer fulfilling demand, it is usually not to make a quick buck. This silver, being in coin form, is obviously not being used for industrial purposes. It is being used as an investment and a hedge.
People who buy silver coins are probably planning on keeping them for a while, regardless of their primary reason. This demand is real.
The buyers and sellers in the futures market certainly count in the demand formula, but their demand is speculation about what everyone else is going to do. The coin buyers care more about the long term. It is not a short-term speculation when most people buy coins.
I have no problem with futures traders buying and selling silver or anything else. But if there is a disconnect – which there seems to be – I will typically take the signals from the physical market.
If you worry about manipulation in the futures market, then just know that the physical commodity always wins out in the end. You are not going to get a sustainable high price in oil if few people are actually buying oil. The same goes for the silver market.
If the demand for silver coins stays up, then we will eventually see the futures market reflect this and catch up.
This may be a reason to buy silver now, but it is not the best reason. The best reason is because of high government debt and a Federal Reserve that is willing to create money out of thin air at the first sign of a financial crisis. This is a long-term outlook though.
If you are going to buy physical silver, I recommend American Eagle coins. Get them while you can at this price. If they drop in price, then get some more.