Saturday, August 13, 2011

Which is the Better Silver Investment? Silver Eagles or 90% Face Coins?

Or 90% Face?
Silver Eagles....
As today seems to be a lazy Saturday afternoon with not much new to report, we thought we would bring readers' attention to an old piece written by Ted Butler's mentor, Izzy Friedman, and open it up to discussion.

Izzy wrote a piece several years ago advocating US Silver Eagles as the best form of silver to invest in.
While USSE's carry the highest premium over spot, Friedman looks for the US Mint to one day soon stop producing eagles entirely, which he believes will cause USSE premiums to skyrocket.

Personally, The Doc thinks that Izzy is correct, yet all of Mr. Friedman's arguments also apply to 90% silver US face coins (Pre-1964 coins)- and some of these very arguments are the reason why The Doc believes  90% US face coins to be the best form of silver to purchase today.
*90% face coins have one of if not THE lowest premiums of any investment form of silver available today, meaning you can exchange your fiat dollars for more ounces of silver in 90% form than you can for silver rounds, bars, Eagles, etc.
*90% face coins have ALREADY been discontinued from production, meaning that the same potential production stoppage of USSE's has ALREADY happened with 90% face US coins!
*90% face coins were also produced by the US Mint, meaning that investors can trust the silver content of the coins at 90% just as much as they trust that the silver content of a silver eagle is .999.
*90% face coins are FRACTIONAL silver pieces, which The Doc believes will result in higher premiums vs. 1oz denominations when the silver shortage arrives and silver reaches valuations near Friedman's levels.

I will include Mr. Friedman's thoughts below.
We are interested in our readers' thoughts and perspective on this issue as well.
What do you believe to be the best form of silver to invest in?

From Izzy Friedman:
Money cannot solve a shortage of material, only material can. When the industrial users come into the market for real material, the shorts will be destroyed. At that time we will have a bigger scandal than the subprime mortgage crisis of today. In my opinion, we need a shortage to put silver in a free market. When this occurs the real value will come and no one can predict what the price will be.

Mr. Butler has a modest view on future prices, and my opinion is more extreme. I can see very high prices. If I tell you the price you will need a seatbelt, not to fall from your chair. With this kind of opinion on future silver prices, what is the best single form for buying and holding real silver? Looking at my crystal ball, considering that a silver shortage is likely, and that silver prices will then reach or exceed the price of gold; I think silver Eagles are the best way to own silver. Why?

I can see silver prices so high, that the risk of imitation or phony silver coming to market will be great. Great price increases always bring out frauds and crooks. People will want to be sure they are buying the real thing. Coins are more difficult to counterfeit than paper instruments. At current silver prices, there has been no big incentive to counterfeit silver Eagles or other forms of silver. Because the US Mint produces silver Eagles, an added level of protection against counterfeiting is present. The US Government does not sit still on counterfeiting.

Because Silver Eagles are sold at a premium to the price of silver from the Mint to wholesalers, few if any of the 160 million regular silver Eagles minted and sold since 1986 have been, or will ever be melted for their silver content. The same with millions of more expensive Proof Eagles and commemorative silver coins issued by the Mint. Silver Eagles that are sold by investors are bought by other coin investors. Therefore, the silver used in Eagle production is taken off the market, in my opinion, forever.

But the premium on Silver Eagles will explode someday, because the Mint will stop making them in the future. When the silver shortage comes, and prices start to escalate wildly, the US Government will not wish to aggravate the shortage by continuing to take silver off the market. By then, the users will be screaming for relief from high silver prices and the mint will see this.

According to Mr. Butler, before the gold and silver Eagle program began in 1986, it was decided that, in order not to hurt domestic miners, only metal purchased from domestic miners would be used in the Eagle program, so government owned metal wasn’t dumped on the market.

But the Silver Users Association, fearing higher silver prices because of demand for Silver Eagles, lobbied behind the scene to change things to their advantage. They couldn’t kill the program completely, but the silver users were still successful. Gold was left unchanged in that domestic production was to be used, but silver was changed so that only silver from the Strategic Defense Stockpile was to be used for Eagles, until it ran out, which it did in 2001. Since then, the US Mint has had to buy more than 50 million ounces of silver to produce silver Eagles.

It will not take much convincing by the silver users to get the US Mint to cease production of Silver Eagles, when the silver shortage hits. So a premium could develop, if and when that happens. The same kind of premium that develops when an artist dies and it becomes known there will be no more new works of art from him. Now some may say, what kind of numismatic premium could develop on a modern bullion coin with a total amount in existence of more than 160 million? I say, a very big premium. The Silver Eagle is no ordinary coin. It is the world’s leading silver bullion coin. The US Government guarantees its purity and weight. It is recognized everywhere. In the years to come, people from all over, including India and China, will want to buy them. It is, in my opinion, the most beautiful coin in the world.

At any point in time, very few old Silver Eagles are available for sale in any large quantities. That’s because Silver Eagles are widely held by many small investors and coin collectors. Many are given as gifts and hold sentimental value. Grandparents, like me, set them aside for their grandchildren. Silver Eagles are not a trading vehicle, they are mostly held for the long term. The market relies on the fact that new coins from the Mint will always be available for sale, in order to satisfy new demand. But always isn’t forever.

When the shortage comes and silver explodes, the price will be so high that most people won’t be able to afford even a 100 ounce bar. Then, there will be much more demand for silver in one-ounce denominations, just like there is for gold today. That extra demand will put a bigger premium on the smaller pieces compared to bigger bars. The best small piece is the Silver Eagle and it will have the biggest premium of any other one-ounce choice. Also, it will be easier to sell in one-ounce pieces when prices are sky-high.

I think the premium on Silver Eagles will go to such crazy levels, that out of respect for Mr. Butler, I will not say a number, because he thinks it will sound too extreme. Instead, I will be very conservative and just say that in the future, when the silver shortage comes, the premium on Silver Eagles to the price of silver will be much greater than the total cost of an Eagle today. If that comes true, it’s like buying silver at today’s price for free.

To those who are inclined to own silver, buy Silver Eagles. To the gold investors, please change some gold into Silver Eagles. If anyone is lucky enough to buy, say, 1000 Silver Eagles or more, in 15 years it will be worth a sum that will shock you. Don’t think for one minute that I have a financial interest in selling Eagles. I don’t work for the Mint or for commissions. I write for love of silver and my friend Ted Butler.
Read more from Izzy Friedman's piece here: