Jul 102015
 

The announcement on Tuesday by the US Mint that it had sold out of silver Eagle bullion coins due to a “significant” increase in demand with no orders being taken until August and possible rationing thereafter has resulted in a surge in coin premiums.

Kitco reported that premiums “have already posted a 50% increase and pressure for further premium adjustments is expected” as “physical demand for all silver products has soared over the past two days.” USAGOLD had already been experiencing strong demand over the past two weeks but “today’s [Tuesday’s] price drop has encouraged another wave of interest.” Gainesville Coins said they were “BUYING American Silver Eagles for more today than we were SELLING them for yesterday!”

Silver Doctors has the best summary of the current state of supply and premiums in this post, with 90% junk bags at up to $3.00, Silver Eagles as high as $3.25 (wholesale), a doubling of premiums on silver rounds and bars, and expectations that the Royal Canadian Mint will soon announce a premium hike.

Silver Doctors feel that “if any further weakness materializes in the paper futures markets for gold and silver, we are looking at the very real potential of 2008 style physical premiums to acquire precious metals.” To put that statement in context, consider the chart below from Sharelynx.com with the current premium increases circled in red.

ASEprem

The current premiums are moving into the 20% of spot range but you can see we have far to go to reach 2008 levels. It is hard to read whether this shortage will be sustained, as the US Mint has not indicated how its blank suppliers are placed and what sort of orders it already had in the pipeline.

Unlike The Perth Mint, the US Mint does not manufacture its own blanks, instead sourcing them from others like the Sunshine Mint and The Perth Mint. The US Mint used to produce its own blanks but Edmund Moy, former Director of the US Mint‏, explains that the decision to stop making its own blanks was “part of the Reagan outsourcing of non-value added to the private sector. Mint’s value added is stamping.”

The outsourcing of blank manufacture is not really the issue as whether one has to source 1000oz bars or blanks, it comes down to forecasting demand and having enough silver bars/blanks in stock to get you over any demand surges. Forecasting can be tricky as demand responds to price and if anyone knew where the price was going with any certainty, they wouldn’t be wasting their time making coins and instead be a hugely profitable speculative trader.

In the case of The Perth Mint, we have good supply of raw silver from our refining operations and plenty in stock. At this stage we have not seen any demand surge out of the US but we would expect that if the shortage continues beyond a few weeks but we are seeing good pick in demand out of Europe for our silver kilo coins. We have recently invested in upgrades to our blank production line which should be operational in a month so are confident of being able to meet increased silver demand.

Some commentators are playing up this US Mint shortage as evidence of a shortage of raw silver but they are getting confused between a shortage of blanks versus a shortage of raw silver. I’ve covered such confusion in my personal blog in the past, see here and one also has to be careful not to confuse production capacity shortages (which I have argued are a real problem if we get mass market demand) with raw silver shortages.