In less than one week, the price of silver gave up some 9 months of gains in a move from $40 per ounce to $28. The current price for silver, which is the lowest price in 9 months, is sure to create shortages for physical silver.
The physical silver market is very much its own market, one which is dominated by small silver investors and coin collectors. Compared to Wall Street, where margins change in a matter of minutes, and global issues permeate throughout trading floors, the local coin dealer hasn’t changed in decades, let alone the past few weeks.
Coin dealers, who are almost always best described as a small business operation, are not often hedged to their exposure. Many who open coin shops realize that the trend is up, and hedging would, over the long haul, be detrimental to potential earnings. Capital appreciation, for many dealers, may have been as profitable in 2010 as selling metals to customers.
After a decline equal to the magnitude we saw most recently, a physical shortage is almost guaranteed. Dealers, who have been buying silver throughout the $40 level, are sure to be unwilling to unload at a 30% discount to their average purchase price. The last time dealer could buy so inexpensively was nearly one year ago, when silver broke through the $30 price level at a pace many found to be unbelievable.
Any dealer who is successful in his or her trade surely hasn’t had to suffer from volume so poor that coins purchased in 2010 would still be on hand today. More accurately, it is likely that dealers have churned inventories several times in the past 9 months, if not several times in the past month alone.
Supplies have surely shriveled up, as well. Those who hold bullion as an investment, or merely part of a collection, are likely to have heard of silver’s performance long before $40 per ounce. Investors who entered the market late into the buying spree surely don’t see much sense in selling out now, especially with high sunk costs.
It should be recommended to anyone who is currently accumulating metals that purchasing silver immediately after a correction is a poor investment decision, especially in physical metals. Dealers, who have long exposure to silver, will surely price in silver’s fall into any metals sold immediately after a dip. Weak hands who wish to lock in profits and losses are going to be tough to sell, as well.
Therefore, for investors who want to double down on what is essentially a 9-month discount on silver, it may be best to wait. Those most eager to re-enter will be making what is a practical “donation” to a silver dealer, paying well above market price to cover some of the dealer’s cost of business.
Wait for the dust to settle. At less than $30 per ounce, paper silver is cheap, but the real deals won’t “trickle down” to physical silver for at least a few weeks.