Low premiums benefit metal buyers

January 11, 2018

Pat Heller

With declines in demand for its bullion products during 2017, the U.S. Mint toward year end dropped the premiums charged to its Authorized Purchasers on gold American Eagles and Buffaloes. This decline in premiums may or may not continue.

Some of the drop in demand can be attributed to lower physical precious metals demand in the United States, unlike 2017 increases in demand in China, India, Germany and several other European nations.

The gold American Eagles are only 22 karat (.9167) purity, which makes them unpopular in China and India, the highest gold-consuming nations in the world. As a consequence, American Eagle demand is highly dependent on demand within the United States.

Another factor in possible decline in demand for gold American Eagles can be attributed to the Royal Canadian Mint having reduced the premiums it charged its primary distributors. This resulted in the one-ounce gold Maple Leaf being available in the United States at about a one percent discount to the one-ounce gold American Eagle.

During 2017, my company experienced a significant shift in customer demand away from gold Eagles to gold Maple Leaves. I have heard similar stores from other dealers.

There is a general trend with gold bullion coins and ingots that when premiums fall, they almost never go back up to prior levels. That occurred with the Austria/Hungary 100 coronas and Mexico 50 pesos in the 1970s, and the British sovereign, South Africa Krugerrand, and U.S. American Arts Medallions in the 1980s.

The risk of a slight loss of future premiums is one reason why my general recommendation is to purchase the low premium issues if they cost less per ounce than issues in current production.

Even today, buying physical gold in the form of Austria 100 coronas, Mexico 50 pesos, and U.S. American Arts Medallions costs you less per ounce of gold content than almost any other issues.

As for silver products, U.S. 90 percent silver coins also fell in premiums over the course of 2017. This week, I checked selling price formulas for companies that appeared in the first three pages of a Google search for “90 percent silver coins.” There were 18 companies that posted their premium levels online. I tried to do a comparison of prices for $1,000 face value bags (715 ounces of silver content), but one company only quoted a maximum quantity price for $100 face value. For $100 face value, this company quoted a price of $4.98 per ounce above the silver ask spot price.

The other 17 companies were far more competitive for $1,000 face value bags of U.S. 90 percent silver coins. Five firms quoted formulas from $1.09 to $1.61 per ounce above the silver ask spot price. Five others were charging ask spot plus 49 to 89 cents per ounce. The other seven dealers were pricing their junk silver bags at 39 cents or less per ounce over the silver ask spot price. These low-price sellers bring the retail premium down to around 2 percent above the metal value.

When retail premiums on 90 percent silver coins drop to around 2 percent, that indicates that these coins are trading wholesale far enough below melt value that the coins could be profitably melted by refiners into pure 1,000-ounce bars to supply to commodity futures exchanges. In this circumstance, that minimizes the prospect of a near term physical supply shortage. I do not expect such low premiums to persist throughout 2018.

More than a decade ago, I observed that the supplies and demand for platinum were averaging about in balance over the years. Because of this, I forecasted that the price of platinum would eventually drop below that of gold. This happened a few years later and has persisted ever since. There is some possibility that discount to gold’s price may end in 2018. With the strong rise in the price of palladium in 2017, industrial users of platinum group metals may increase their demand for platinum this year as a substitute for the palladium they previously used to make catalysts and other fabricated products. To the extent this occurs, that creates the potential for platinum to be the best performing precious metal for price rises in 2018.

For reasons I discussed in recent previous commentaries, I anticipate the precious metals prices in 2018 may be both volatile and likely to move upward. Should this come to pass, that means that today presents an excellent opportunity to acquire some bargain-priced physical gold, silver and even platinum. Stay tuned.

If you agree that it is best to buy the bullion coins with the lowest premiums, best get going on acquiring whatever 90 percent U.S. silver coins that you might need. You might also be doing future collectors a favor by keeping these coins out of the hands of the refineries.