The Price of Silver Coins

The case for buying silver coins is strong. But the case against buying silver coins may be stronger.

Don’t get me wrong, I love silver. And so do millions of other Americans—so much so that the U.S. Mint sold a new record amount of silver coins last month.

“As of January 29,” reported Reuters, “silver Eagle sales for the month were 7.1 million ounces, data from the U.S. Mint’s website showed, surpassing its previous record of 6.1 million ounces set in January 2012.”

David Beahm, vice president of New Orleans coin dealer Blanchard & Co, described the demand to Reuters:

“Not only do we have clients calling in, they are buying in huge quantities. They are buying the entire 500-ounce boxes that are sealed by the U.S. Mint, that’s what people want right now.”

That’s what people want, indeed. But they may not be getting as much as they think.

Sure, as far as the silver content goes, the coins are pure. I’m referring to the coins’ investment value—the profit potential of the money being spent.

Now the case for silver rising to new highs in the future is not just credible; it’s pretty much certain, according to many. Writing for ETF Daily News, Michael Lombardi summarizes the reason for such high expectations from silver:

“The rush to silver and gold is (of course) fueled by excessive money printing by the central banks, the global race to devalue currencies, and increased inflation.

“Central banks around the globe are printing non-stop,” he explains. “You don’t have to look as far as Japan, South Korea, or Russia to find countries increasing their money supply. Our very own [US] Federal Reserve is spending $85.0 billion a month buying mortgage-backed securities and government bonds. That $85.0 billion is ‘created’ each month.”

The idea here is that the over-printing of money will cut a nation’s currency into ever smaller pieces; like cutting a pie into smaller portions, each piece gets smaller. You would, then, need more dollars to buy an ounce of silver, since each dollar is worth less. As a consequence, the value of silver rises.

Mind you, simply printing more money does not necessarily devalue a nation’s currency if its economy can grow at a faster pace than the growing money supply. Unfortunately, despite some positive economic numbers in many parts of the globe, the money supply is growing at a faster pace.

The case for investing in silver, then, is sound; especially since silver has the tendency to move in greater percentages than gold.

But the case for silver coins may not be so strong when you consider the costs involved. Costs like mark-up, shipping, storage, and insurance can diminish the value of your return on investment when you sell. Of these costs, the mark-up is often the most crippling.

At the U.S. Mint’s online store, one 2013 American Eagle One Ounce Silver Proof Coin was selling for $62.95 on February 13^th, 2013. Spot silver closed at a price of $30.78. That one-ounce silver coin could be buying you two ounces of silver in its stead.

In defense of coins, however, they do offer more than just the metals they are comprised of. There are special designs and seals, a limited issuance, a certificate, and even an attractive display case. What is more, over time the value of coins as collectables will almost always increase.

But will this increase keep up with the increase in the price of silver? More difficult still, will a one-ounce collector’s coin keep up with two ounces of the metal… which is what you could be buying for each coin?

In an article for Silver Monthly, Adam Doolittle addresses:

“The problem with these coins as investments is that their numismatic premiums are unlikely to keep up with the rise in the price of silver. For example, if silver goes up 177% from $18 to $50, then a one-ounce numismatic collectible coin valued at $100 is likely to go up by only 32% to $132. The collectible coin will go up based on the silver it contains, but there’s no reason to think the numismatic premium will increase too. Perhaps the numismatic premium will go up with inflation, but assuming silver beats inflation, numismatic coins are still a bad bet.”

Depending on your own circumstances, a much more effective alternative to coins might be investing in one of many silver based exchange-traded funds, the iShares Silver Trust ETF (NYSEArca: SLV) being one of several. By law, these funds are required to have physical stores of the metal itself to back the total investment by shareholders at any given time.

ETFs offer additional tools that a more experienced and informed investor can avail themselves of, such as using small amounts of margin to control a slightly larger amount of silver than their cash balance alone could purchase, buying put options to protect their holding, or even buying call options to gain the benefit of leverage while limiting their downside risk.

On the ‘flip side of the coin’ (I couldn’t resist), ETFs and mutual funds have costs of their own, including management expenses, commissions on trades, premiums on options, and interest charges on any borrowed margin.

In all approaches to silver investing, as with all other investments, always count the costs of the avenues available to you before making your selection.

And though silver coins may not help you profit off of the rise in silver, they can be a good place to store wealth.

Joseph Cafariello