Saturday, September 02, 2006

In silver, size does matter

So you've finally come to your senses and have decided to invest in silver, now it's decision time.

Assuming you want physical silver rather than some substandard paper product, you must now decide both the form and size of this silver. In making this decision the first thing you must realize is that size does matter with silver, it modifies the price per ounce, it also complicates storage and it reflects your rational for buying the silver in the first place. The following information and personal reflections should help you make your purchasing decisions.

The Bar charge- when you first go to buy silver you expect to pay roughly the price quoted on sites like Kitco, but this is not the case. These prices are based on large purchases made up of nominal 1000 oz bars. These bars are poured, polished, weighed and stamped involving certain labour and handling costs. If you make 10 bars at 100 oz or 100 bars at 10 oz, the total labour and handling cost increases in each case vs. the cost minting a single 1000 oz bar, his added cost is called the bar charge. If you are dealing with Scotiabank, the biggest bullion outfit in Canada the bar charges are as follows
10 cents per oz on 1000 oz bars
30 cents per oz on 100 oz bars
90 cents per oz on 10, 20, and 50 oz bars
2.10 per oz on smaller units. (I believe)
For example a 1000 oz bar at $10.00 per ounce would be $10,100 + $5.00 transaction fee for a total of $10,105
The same amount of silver would cost $10,305 in 100 oz bars
$10,905 in 10 oz bars, and even more in smaller bars --you get the idea.
So size will impact how much silver you can afford to accumulate.

Beyond the normal bullion bars discussed above are also four other categories of physical silver you can invest in.

Numismatics

Art bars

Rounds

Junk silver

Numismatics are collector coins which vary in price on the grounds of age, rarity, and condition. This is a great way of spending money and time, but has limitations as an investment. Coin fans will tell you this is a great investment, but I don't buy into this. Since these coins are sold at very high premiums over their metal content so you are really investing in rarity, age, and condition not silver. During hard times, I can see people selling valuable coins below collector price out of desperation simply for lack of another collector to buy it. You have to figure, if you're desperate enough to sell it's quite likely many others are hurting too. Desperation means, you might not get more than metal value if you rush to sell. Numismatics is hobby that takes a great deal of time and research -- not only what you're buying, but also how to grade coins, how to spot fakes etc. If you like to look at beautiful coins, fine, go buy some, but if you want to invest in silver for silver's sake, don't buy numismatics. The Canadian silver Maple leaf is both coin and bullion, they are very pretty, have a $5 face value and .999 purity, but sell at the highest premium over spot price of any silver bullion. While I do have a few of these but I certainly would not recommend building your hoard with them.

Art bars are small silver bars that have been visually enhanced with pretty stamped images. These are great for gifts and can act as a hook for those unwilling to admit they are Silver Bugs. If you want someone you love to have some silver but they don't understand or believe your rational, art bars are great way of sneaking them some silver. Wait for some occassion, buy them some art bars and they will be forced to hold onto them out of sentiment. After some time admiring them and asking you questions you just might convince them you’re not mad. I see nothing wrong with buying art bars as long as they are marked .999 silver, you can identify the mint, and they are not sold at an unrealistic premium over other silver.

Much like art bars, silver rounds are usually struck by smaller independent mints like Northwest Territorial Mint who make their own rounds and bars and also those for Pan American Silver. As long as rounds are from a reputable mint and are marked .999 these are usually a good buy. Rounds generally have a lower premium than small bars from the big established bullion companies like Johnson Matthey, Engelhard or the Royal Canadian Mint. While rounds are coin like in size and shape they are measured by the weight and have no face value. I rarely see rounds offered often in Canada so a large purchase would likely involve an order from the U.S. and dealing with customs and duty.

Junk silver are old coins that have more metal value than collector value. At one time U.S., Canadian, and other world coins had a sizeable silver content. Those that did not get melted down have been saved by people in small coin collections or huge bags of up to 1000 dollars face value. Depending on country and year of mint these coins range from 40%-90% silver content. A 1000 dollar face value bag of 90% U.S. coin has approximately 712 ounces of silver content but it's not pure or quickly recoverable silver. Junk silver can be a good investment with a low premium over spot price but it is not accepted by all dealers and banks will only give you face value. Junk silver is probably best suited for survival coin in case of finacial crisis.

Junk silver is often sold in $1000 face dollar bags and is currently going for about $8.10 per face dollar. This means a bag is running about $8100.00 plus shipping and handling. Smaller bags are available but they will cost a bit more per face dollar or you could split a big bag with someone you trust. One problem with Junk Silver in Canada is that it's not pure enough to be rated bullion which is tax free, this rule means that gst, and in some provinces pst is charged. I figure buying non collectible coins is simple making change and should be tax free, however I don't make the rules. If you often travel to the states, buy a bag, store it in a safety deposit box and bring some back each trip. You can bring some back in your pockets, some in the ashtray, and some in a souvenir piggy bank the kids are told to fight over at customs. If it gets noticed, play dumb and pay the tax but I suspect 9 out of 20 times you'll get it through. If you are not preparing for fiscal crisis there is no real sense in collecting junk silver, while cheaper per ounce it's much harder to resell.

The various sizes of bars can also complicate the storage of your bullion. Some people may have a small safety deposit box at best, but many don't have one at all. These boxes can range from 1.5"x5"x24" up to 10"x10.75"x24". The smallest box cost $35 a year but the largest was $230. If you do happen to rent a safety deposit box you'll find that many of the older rough bars will only just fit height wise of the smallest boxes available and depending on the shape of your bars you might get only 2-4 100 oz bars in the box. If you did buy a 1000 oz bar I'm not sure a how large a box you would need to hold it or how available these boxes are. The smaller bars or rounds will stack nicely in any sized box, they are also nicely sized for stashing small amounts in hidey holes if that is your decision. Remember, Canadian safety deposit boxes are a tax deduction, don't forget to declare them.

You could also buy a safe or hide your silver, I've seen many discussion on where and how to hide your silver if you don't want to pay the cost of storage, or you simply don't trust the government and banks. I think hiding your hoard is worth a post of it's own at a later date. I've seen suggestions that run from crazy to brilliant, and some are even crazy brilliant.

The next consideration is motive. Why do you wish to own silver? How long do you expect to keep it? Under what conditions would you be willing to or expect to sell your silver?

If you are buying your silver for short term gain, and you expect to sell your entire holding at a certain target price then big is beautiful: buy as much as you can afford in the largest bars. This also simplifies accounting, handling and lowers you average buy price. However, take into account your ability to move 1000 oz of silver -- if you have a hard time carrying acase of beer or a bag of groceries you are in for trouble hiking these monster bars around.

The moster bars could be scaled back to mid sized bars which would allow you to sell a portion of your bullion at one target price and ride the rest knowing you've recouped your some or all of your original capital. 100 oz bars are a happy medium of reasonable premiums, manageable weight, and ease of accounting. For private sales, 100 oz bars are probably the largest you would want, when silver hits $50-$100 per oz the likelihood of selling a 1000 oz bar to anybody but the bank is slim. Note: If you sell to the bank they record the transaction and you had better account for and declare capital gains, lest the bank do it for you and you get nailed with evasion.

If you are buying silver out of fear of some fiscal crisis such as hyper-inflation, massive devaluation or collapse of fiat monies, your buying pattern will be totally different. In this scenario you would want a good part of your investment to be in smaller sized bars, rounds and even junk silver, (sometimes called survival coins). These small, portable and proportioned units of real silver, could once again become accepted currency and would retain their buying power vs. inflation or fiat collapse unlike paper currency. In this situation hoarding would take place and leaving very little bullion on the market, for this reason small is good! If you make a transaction in silver you may find you're unable to get anything you value as money back for change. This is why all gold bugs should have at least some silver in their holdings. Gold while sharing the same strengths of a real asset with silver, will appreciate so much you would be unable to use it in most day to day transactions. If you find it hard to break a 50 dollar bill at a Tim Horton's today you certainly can't expect to pass an ounce of gold during a crisis. The exception for this would be very large and privately held transactions unless for some reason you want to be followed home by thugs after flashing your gold in public. If fiscal crisis is your rational for owning bullion and especially silver, your first purchase should be 1 oz bars/rounds and junk silver which you would then divide and store in small quantities in a variety of locations for security.

Gold is ok in a fiscal crisis if you wish to hoard large amounts of personal wealth in less space than silver or if you have need to smuggle your wealth somewhere else, otherwise it all comes down to how much you are planning to invest. Under 25 thousand I think you should stay in silver only, It's likely a better investment and it will be easier to spend. If you must have a mix of gold, I would suggest that coins in pure gold like the Canadian Maples leaf are a bad choice because they would easily damage if used in day to day commerce. Gold coins with scratches would be sold at a discount based on damage so it's best to avoid softer coins. I would suggest gold Sovereigns, they are alloyed to 22k giving them more durablity to survive in circulation. Each Sovereign is .2354 troy oz making it easier to pass than a full ounce of gold. Other alloyed coins like the Krugerrand or American Eagle are common and can sometimes be found in other sizes like 1/2 oz, 1/10 oz. which would also be easier to spend. More obscure, harder to recognize coins should be avoided. If you do have 1 oz. bars, or any size of Maple leaf please leave them in whatever protective packaging they came with to maitain their value.

I hope this gives you something to think about while you're digging holes in the foundation to hide your stash.

Happy Hoarding

Lord of Wealth.

4 comments:

Niki said...

Why do you refer to paper silver as substandard? i have both silver ETF shares and gold you can fold..

Lord of Wealth said...

The simple answer would be trust. Each instituion offering paper or digital gold and silver may or may not have the amount of bullion they are selling. Some of these organizations are undoubtedly have bullion that may or may not be leased out.
Physical silver/gold you can hold, you know it exists, you hopefully know where you left it, and it can be hidden in case of confiscation. Now I've mentioned before that confiscation is propably not an issue in Canada, but do you know what country your foldable gold is stored?

Short term or as a secondary way to hold metals some of the better vehicles in this catagory may be o.k. Some are certainly better than others, some I would endorse (if paid in bullion) others I would not.

I can say with confidence I believe in physical bullion. After all the whole point of bullion is to avoid paper and paper products which are less than real.
Paper, whether as an ETF, silver certificate, stock or future puts the real control of your wealth in someone elses hands. Just look at the value of paper when a default of a Nickel delivery recently too place on the London market. Did they force the delivery or liquidation of the Miscreant who could not deliver? No, they changed the rules allowing a daily penalty charge for failure to deliver. This I'm sure was not satisfactory to and industrial buyer who could end up shutting down a factory.
All paper is an IOU and I personaly don't trust people enough to put my survival nest egg to the test of someone elses honesty.

Anonymous said...

here here.

Silver as Investment said...

Quite useful info regarding silver investment. I think it is far better to invest in silver rather than stock market. Physical investment is safer way. Coin and bar are the best forms of gold and silver and these items should be purchased in this form only.