Driven by crashing markets and a viral pandemic, 2020 has proved to be the United State’s deepest financial crisis since the Great Depression. And that is saying something, considering that the 2008-2009 recession was a near-death experience for the capitalist system. Global stock markets are plummeting, corporate bond markets are freezing and bid-ask spreads in all asset classes are blowing out in truly historic moves. And all of this is happening in spite of the fact that the Federal Reserve is printing money as fast as it can.
The Silver Problem
So it shouldn’t come as a surprise that near-chaos has arrived in the U.S., with people hoarding toilet paper, food, and ammunition. Precious metals have also seen skyrocketing demand in these troubled times, leading to massive premiums for physical gold, silver, and platinum bullion.
Silver, in particular, has been in extraordinarily high demand. In fact, demand for silver has been so high that it wouldn’t be an exaggeration to say that we are currently experiencing a silver shortage of incredible proportions. Some bullion dealers have simply run out of inventory - an unprecedented event.
Under normal circumstances, a large dealer will have hundreds of different kinds of silver products available for sale - everything from government-issued coins to privately minted rounds and bars of all sizes. But worried investors have been buying with both fists as the economic situation worsens. As a result, dealers have had an incredibly difficult time keeping anything in stock. Let’s walk through some examples of just how crazy the silver shortage has become.
Junk silver, old 90% silver U.S. coins struck before 1965, is front and center in this unfolding disaster. These coins used to be one of the cheapest (and best) ways to stack silver before the coronavirus and financial crisis hit. But now premiums have shot through the roof. A $1,000 face-value bag containing 715 troy ounces of pure silver could be purchased for $12,500 in early March 2020 -12.5x face value. This represented a premium of about $0.50 an ounce, or around 3% over melt at the time.
By late March 2020, that same bag of junk silver cost you $17,800 (17.8x face value). But the real problem is that the spot price of silver dropped considerably during the same month, from around $17 an ounce to only $14.50. As a result, the premium for junk silver bags exploded to over $10 an ounce - a stunning 70% premium over spot.
American Silver Eagle bullion coins are no less expensive. Before the crisis hit it was common to find these popular coins for around $3 over spot, or a 17.5% premium. But now they cost anywhere from $9 to $11 per coin over bullion value. This comes out to a prodigious 62% to 75% premium over spot.
The Silver Shortage
And this assumes you can find silver to buy at all. Many silver bars and government-issued bullion coins are unavailable at any price due to a stampede of buyers, coupled with insufficient supply. In many ways, the present situation mirrors what happened in the precious metals market during the 2008 financial crisis - except on steroids. Premiums exploded on many silver products back then too. But the key difference is that our current silver shortage of ounces of silver is much more likely to be a long, drawn-out affair. It would be useful to examine the details of why we are seeing a silver shortage right now.
The first explanation for our current silver shortage for industrial demand is the collapse of global stock markets. The S&P 500 experienced a 35% peak to trough decline in early 2020, which is troubling in its own right. The real problem is that this drawdown occurred over the course of just a single month. That sort of volatility is unprecedented, especially when you consider that investors had been lulled into a false sense of security by equity markets that persistently wafted higher for years beforehand.
People who were spooked by losing a third of their life savings in the markets in a mere 30 days naturally looked around for more tangible investments to balance their paper-asset-skewed portfolios. Silver was one of the obvious choices, leading to exploding demand for physical coins and bars.
The next contributing factor to the silver shortage of 2021 is the specter of zero interest rates. As recently as late February 2020, the Federal Funds rate was still at a (relatively) robust 1.5%. This meant that prudent savers could expect some return on their rainy day fund of US dollars held by central banks, albeit a modest return.
But as the largest market dislocation since the Great Depression tore through the economy, the Federal Reserve went back to one of the only tools it has: lowering interest rates. The first cut came on March 3rd, 2020 when the Fed lowered rates from 1.5% to 1%. As the economic situation continued to rapidly deteriorate, they followed up with a panicked intra-meeting cut to 0% barely two weeks later. Now, we’ve seen this story before.
The first time around was during the 2008 financial crisis. At that time the Federal Reserve swore up and down that lowering rates to 0% was an extraordinary measure that would be rolled back the moment the economy stabilized and higher prices returned. The Fed was lying of course.
It took them almost 8 long years to raise interest rates off the zero bound. And during that time savers received no interest on their CDs, savings accounts, and money market funds. This wasn’t an accident. The Federal Reserve consciously used this immoral policy as a way to recapitalize the criminal, too-big-to-fail banks in the wake of the 2008 collapse and investment demand. Except for this time, average people know that interest rates are going to stay at the zero bound forever, or at least until we have a new monetary system in place.
Consequently, smart savers have begun the process of converting some of their savings from dollars into precious metals and have a physical demand. After all, a zero interest rate policy pretty much ensures that any fiat-currency savings you have will shrink in purchasing power over time due to inflation. So you’re better off buying physical gold, silver, or platinum, rather than holding onto steadily depreciating dollars (or euros, pounds, or yen, for that matter).
The Liquidity Crisis
The final reason for the ongoing silver shortage is a little more complex than the first two. The capital markets experienced a liquidity crisis of epic proportions during March 2020 - an event on par with financial dislocations last experienced during the Great Depression of the 1930s.
This liquidity crisis occurred when levered institutional financial players (like hedge funds) needed to sell assets in order to meet margin calls. In other words, they had to post additional cash collateral against their outstanding loans as markets fell off a cliff.
Before the crisis hit many hedge funds were loaded up with junk bonds, CDOs, over-the-counter derivatives, and other undesirable, illiquid assets. As these poor quality assets declined in value during the crisis, funds naturally received margin calls on any borrowed money. But the funds couldn’t sell their really nasty securities to raise cash because nobody wanted them.
So instead, hedge funds sold whatever assets could catch a bid. Unsurprisingly, the assets that remained liquid in the depths of the crisis were few and far between. In fact, the shortlist is only two assets long: U.S. Treasury bonds and precious metals, including silver. Now you might reasonably ask yourself how hedge funds selling silver could possibly lead to a silver shortage. Well, it can’t - at least not directly. But it did contribute to the massive divergence between spot prices and the cost to acquire physical silver, leading to exploding premiums.
This is because when hedge funds and other institutional investors buy precious metals, they almost never buy the physical metals. Instead, they purchase paper metal - usually futures contracts. So when they liquidate silver to meet a margin call, they are actually selling futures contracts rather than real, physical metal.
But the public understandably wants to buy physical silver, not empty paper promises. As a result, premiums skyrocketed and we found ourselves in the strange situation where the spot price of silver hit an 11-year low under $12 a troy ounce on March 19th, 2020 while you couldn’t touch American Silver Eagles for less than $20 to $25 apiece. Now that we know the why of our current silver shortage, we can talk about when it might be resolved.
The Silver Problem
We are never going to go back to the good old days of junk silver selling for $0.25. To $0.50 an ounce over spot. And it will be a long time before government-issued silver coins and privately minted silver rounds and bars are available for less than $2 or $3 an ounce over spot. The silver shortage is likely to be a long, drawn-out affair.
The first is the sheer magnitude of demand. Every single bullion dealer has a message on their website alerting customers to product shortages, shipping delays, and minimum order increases. Everybody is buying silver right now -at least everyone who knows the score, financially speaking. This group understands that while the COVID-19 pandemic has taken a sledgehammer to the economy, the 2021 economic crisis has been a long time coming.
The Fed spent the last decade meticulously blowing the largest securities market bubble in the history of mankind. Something was going to pop this bubble eventually. It just happened to be a killer virus that gutted the global economy and revealed the outrageous extent of market overvaluation.
Low or inadequate precious metals output is the second major factor ensuring that the 2021 silver shortage will linger on. For example, the U.S. Mint temporarily sold out of 2020 American Silver Eagles in March. The Royal Canadian Mint also ran out of Silver Maple Leafs around the same time. This has helped contribute to the sky-high premiums for government-issued one-ounce bullion coins in the market.
Now, these mints can certainly strike more coins, but they are also constrained at the same time. The entire world is operating under a pandemic watch, which severely limits industrial production. The U.S. Mint is not exempt from these realities, which could easily curb output at their facilities. Not only that, but the Mint might run into problems getting the coin blanks it sources from third-party suppliers (most notably Sunshine Minting).
For its part, Royal Canadian Mint actually closed in late March 2020 due to the pandemic. Other precious metal producers and fabricators, both government and private, face similar disruptions. For instance, South Africa just announced that the entire country (including the mining industry, which produces a significant share of the world’s platinum, palladium, rhodium, and gold) will shut down for 3 weeks to combat the spread of COVID-19.
The three biggest Swiss precious metal refiners - Valcambi, Argos-Heraeus, and PAMP suspended operations at their factories near the Italian border in late March 2020. And individual gold and silver mines too numerous to mention have temporarily closed all over the world due to the virus. In other words, the production of silver bullion will only come back online slowly and haltingly in the face of overwhelming demand.
This leaves silver stackers and tangible asset investors with one burning question: how do I find and buy cheap silver? Happily, I still think there are ways to find silver bullion at (relatively) reasonable prices if you look hard enough. The physical precious metals market is obviously moving very fast at this time.
Whether To Buy Silver
A first suggestion is to buy old, circulated U.S. junk silver on eBay. While bullion dealers on the silver market are charging close to 18x face value (if they have any stock), you can still find rolls of 90% junk silver for only 15x to 16x face value on eBay (with free shipping in many cases. This might still be a hefty premium over the (purely theoretical) futures-driven spot price (currently $14.50 an ounce - about 10.4x face value), but it is still one of the best deals out there if you want fractional silver.
A second hot tip is to frequent the websites of micro-foundries that produce hand-poured silver bars. These works of art usually sell for premium prices on the bullion market compared to generic silver rounds or bars. But in today’s upside-down world these small silver bar fabricators often have the best prices out there - at least for now. This includes companies like Vulture Peak Mines, Bison Bullion, Yeager’s Poured Silver, and Monarch Precious Metals, among others.
A final bit of advice for the frustrated silver stacker is to consider buying gold instead of silver. The gold-silver ratio is hovering around 115 at the moment, which makes the precious white metal criminally undervalued compared to gold. But that ratio is based on paper prices, not physical prices. In reality, the gold-silver ratio is closer to 80 or 90 to 1 if you want to buy physical metals (and can find them). This still skews towards silver as being the better deal. But those prepared to push forward in their search for physical silver accept paying premiums over spot of anywhere from 50% to 100%.
Some tangible asset investors simply can’t bear to pay premiums that high. For those people, gold is the next best thing. While premiums on gold coins are certainly elevated to where they were pre-crisis, they aren’t outrageously high (yet). For instance, 1 ounce American Gold Eagles are generally selling for between 10% and 15% premiums over spot at the moment.
Especially good are the government-issued, multi-coin gold proof sets. These sets usually contain 1 ounce, ½ ounce, ¼ ounce, and 1/10 ounce coins for a total of 1.85 troy ounces of pure gold (although this can vary by set; some include a 1/20 ounce coin). The most well-known type is the American Gold Eagle proof set, but Australian Kangaroo, Canadian Maple Leaf, Chinese Panda, British Britannia, and South African Krugerrand proof sets can also be found.
The advantage here is that these coins are all proofs, which should normally trade with a slight numismatic premium. However, because the precious metal market is so unsettled right now it is possible to buy these sets at premiums comparable to regular bullion coins. So when you buy a proof set today, you essentially get any future numismatic potential for free. The downside is that these sets are expensive. A typical 4-coin proof set runs anywhere from $3,300 to $4,000 with spot gold trading for $1,600 an ounce. Still, it may be worthwhile if you want to invest a significant amount of money.
The 2021 silver shortage is challenging for those who want to preserve their wealth. Unfortunately, our present silver shortage is likely to get worse before it gets better.
Discussion about whether or not there is a silver shortage has divided the silver community. More information about the situation has recently come out. The discussion usually revolves around points of view: that there is no silver shortage, merely a coin shortage as certain Mints run out of blanks to mint coins. For instance, according to The Silver Institute, the world’s silver supply is in deficit by 57.7 million ounces. Nonetheless, news sources seem to only confirm a shortage of American Silver Eagles, Canadian Silver Maples, Austrian Philharmonics, British Britannias, and Perth Mint silver coins.