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PRECIOUS METALS: Based on trading activity and reports, the following markets 
The Big Disparity There is currently a large disparity between the price of physical metals and the price of precious metals futures contracts at the commodity exchanges. The difference is substantial. On Friday, November 21st, Monex was selling a one-ounce Silver Eagle coin for $14.14 and Northwest Territorial Mint was selling that same one-ounce Silver Eagle coin priced for $14.44. On Ebay, Silver Eagles were selling from $15.50 to as much as an incredible $25.00! Yet that very same day, silver for delivery in December closed at $9.48 an ounce on the Comex futures exchange. So why do the bullion dealers have silver coins priced at a premium of 50% over the spot futures market and online auction stores like Ebay have premiums as much as 64% to 164% over the spot futures market? It all comes down to the simple laws of Supply and Demand. The small investors are snatching up all the one-ounce silver coins they can muster. They buy up all the coins they can afford and then store them away. This actually pulls the coins out of the market and decreases the available supply. As long as demand stays the same or even increases, the reduction of supply naturally drives silver prices higher. This phenomenon occurred during the big ‘Y2K scare’. A smart investor holding one thousand of the one-ounce silver coins could have sold his inventory of coins and immediately put it back into a 1,000 ounce bar. He would also have enough additional cash to purchase five more 100 ounce bars. This effectively increased his silver holdings by fifty percent by taking advantage of the market disparity. After Y2K proved to be a non-event, the premiums on the one-ounce silver coins vanished. Silver futures contracts have belonged to the realm of leveraged speculators and traders rather than investors. One regular silver futures contract controls 5,000 ounces of silver per contract or 1,000 ounces on the ‘mini’ silver contract. Most players in the silver market never end up taking delivery of the underlying silver. They are merely speculating on the price movements of the market and putting down a deposit of just a fraction of the value of the silver contract. This affords them tremendous leverage, but it also means that many of them do not actually have the funds in their account to pay for the entire futures contract. This makes physical delivery of the contract a rare occurrence. It has been estimated that less than 2% of all the outstanding silver futures contracts are actually taken possession of. It’s typically just the larger Commercial interests, such as jewelry manufacturers, that wind up taking physical delivery on the futures contracts. So while the speculators have undeniably created a demand for the silver futures contracts, they have not contributed much true demand for the actual underlying silver bullion. Therefore, the surge in physical demand for the one-ounce silver coins vs. the ‘business as usual’ approach of not taking delivery on the leveraged silver futures contracts has once again created a rather large disparity between the prices of the two different silver markets.
The Waiting Game Another problem with the coins that some investors have discovered is the frustrating fact that there can be a substantial waiting period to get their hands on their investments. Some bullion dealers have told customers it will be a few months before their silver is actually delivered. This is especially true when you purchase large quantities. The dealers are citing tight supplies and backlogged orders as reasons for the delay in shipment time. Some dealers are not even taking orders for the one-ounce Silver Eagle coins. One source wrote on their site that, “The US Mint cannot keep up with demand and has interrupted production”. Although you can still get some of the silver coins quicker if you buy them on Ebay, you sure will end up paying a stiff premium for that luxury. One Man’s Misfortune Is Another Man’s Fortune The good news is that investors can take advantage of this big price disparity. Instead of buying silver coins, an investor could choose to go the route of utilizing the silver futures markets. There are three ways that one could do this: Buy a leveraged silver futures contract in a highly liquid market to speculate on price movement, buy a silver futures contract without leverage in order to take delivery and store it in the exchange-designated warehouses, or take actual physical delivery of the bars and move it out of the warehouses. Let’s discuss each option a bit further. Leveraging Your Bet The commodity futures markets are a highly liquid marketplace. Investors/speculators can control a lot of silver with just a fraction of the money down. Right now, the margin deposit to control a 5,000 ounce silver futures contract is $8,640 at the Comex futures exchange. At Friday’s close of $9.48, a 5,000 ounce silver futures contract was valued at $47,400. This allows you to have leverage of greater than 5:1. You can control five dollars worth of silver for every dollar you put up as a ‘good faith’ deposit. Of course, leverage is a two-edged sword. It can work against you just as easily as it can work for you. Whether trading stocks, buying real estate, or getting involved in the commodity markets, one should be well-capitalized and have thoroughly researched the investment idea before dipping a toe into the water. The more leveraged you are, the more dangerous it can be. If the market declines you can be forced to pony up more money to cover any losses or else liquidate the position. Leveraged bets in the commodity markets are not for everyone. Why Lease When You Can Own? Perhaps you think you’d rather not purchase the one-ounce silver coins while they are selling at such a high premium. Yet you may have decided that the risk of a leveraged commodity contract is not your cup of tea, either. If you desire to actually own the underlying silver, the plan of action for you may be to simply buy the futures contract and take delivery of it. To do so, an investor will still need to have a commodity account opened. But instead of putting 15%-20% down as collateral, the investor would actually deposit the full amount of the 5,000 ounce silver futures contract (it was worth $47,400 on Friday, November 21st). The process for taking delivery would go like this: First, purchase a silver futures contract on the Comex futures exchange for the closest delivery month possible. Currently, the December silver contract would be the right selection. The commodity brokerage will charge you a commission for this transaction. The typical commission and fees can range between $75 and $150 per contract, depending on the brokerage. Next, inform your commodities broker that you intend to take delivery of the silver futures contract. This will give him a ‘heads up’ so that he can be prepared to help you facilitate the transaction. Once the First Notice Day arrives, the Comex futures exchange will begin the process of issuing delivery notices to those who are still holding the silver futures contracts that were purchased earlier. The First Notice Day occurs on the last business day prior to the month of delivery. Currently, the First Notice Day for the December silver contract is on Friday, November 28th. Once you have received your notice of intent to deliver, your account can then be debited for the full amount of the silver contract that you purchased and a one-time delivery fee (around $50 per contract) will be charged. This process can sometimes take a few weeks as the Last Trading Day for a silver futures contract occurs close to the last business day of the month of delivery. Currently, the Last Trading Day for the December silver contract is on Monday, December 29th. Once the delivery has been made, a receipt is deposited into your commodity account. This certificate will show the amount of silver you own, the designated warehouse that it is stored in (there are several exchange-designated depositories that are all located within a 150 mile radius of New York City), and a serial number. These depositories charge small monthly insurance and storage fees of about $20-$40 per bar every month. If you no longer wish to own the silver you can simply sell it back onto the futures exchange like you would a regular futures contract. This is a very easy process as the futures markets are highly liquid. You would just pay the typical commission and fees (usually between $50 and $100 per contract) to do this. Once you have liquidated the silver position you will have the cash deposited back into your commodities account. A Bird In Hand Although not as common, some silver investors wish to take the ownership process one step further and actually take their physical silver out of the warehouses. In today’s uncertain economy, some people sleep better at night knowing with certainty where their silver is sitting at. Although their wine cellars or the safes in the back of the closet are probably not as heavily armed as the Brink’s warehouse, it gives some investors greater peace of mind to know that they have immediate access to it. As the saying goes, “A bird in hand is better than two in the bush”. To remove your silver bars out of the warehouse you would first do all the steps described above. In addition, you will need to notify your broker that you wish to take your silver bars out of the warehouse. The brokerage firm or clearing firm would then put you in contact with the exact warehouse where your bars are stored. Once this is done, your commodities broker is out of the picture. You now need to arrange the transportation of your gold from the warehouse. The warehouse will likely charge a fee of about $25 for removal. The shipment of the silver bars is usually done by using a security shipping service such as a Brink’s armored truck. The cost for shipping 1,000 ounces of silver from the New York warehouses to most major cities in the US will be around $420. The cost for shipping 5,000 ounces of silver from the New York warehouses to most major cities in the US will be around $1,625. It doesn’t matter if you live in Chicago, Miami, or San Diego. The shipping costs will be very similar. If you live in a more remote area, such as Montana or Alaska, you can expect to pay more. You can simply call Brink’s and ask them for an estimate of shipping costs. The breakdown in shipping costs to most major cities in the US is currently as follows: $3.94 per lb. for shipments, a forty-five cent per lb. ‘field fee’, a charge of $20 for airport security, and a $100 delivery fee. Important: Brinks, Inc. will only deliver to businesses and banks. They will NOT make deliveries to a private residence! Some investors have used mail carriers to ship their silver bars. The costs may be lower, but so is the security. However, some of the mail carriers have stated that their policy restricts them from shipping gold and silver bullion (Fedex is one example). So be sure that the carrier you choose will ship it for you. In talking directly with some of the depositories I discovered that several bullion owners have actually driven to the warehouse and picked up their bars, loaded them into the back of their SUVs, and drove away! If you pursue this course of action, please don’t tell any neighbors what you’re doing. This may reduce your transportation fees significantly, but it also increases your risks significantly. An Option For Smaller Investors The NYSE-LIFFE exchange also has a smaller silver contract available. Their ‘mini’ silver contracts are one-fifth the size of the COMEX 5,000 ounce contracts. An investor who wants to purchase silver in 1,000 ounce increments can purchase the ‘mini’ silver contracts that control 1,000 ounces of silver. The delivery process and fees are the same. For the 1,000 ounce ‘mini’ silver bars, the HSBC depository in New York is the only exchange-designated depository that the NYSE-LIFFE exchange uses. So the only real difference between the COMEX 5,000 ounce silver contract and the NYSE-LIFFE 1,000 ounce ‘mini’ silver contract is the size. Spread It Around Here’s an interesting strategy to consider. If you currently own several thousand of the one-ounce Silver Eagle coins, you might want to consider selling several ounces at these inflated premiums and then put the proceeds back into 1,000 ounce silver bars. If the one-ounce coins are selling for a 50% premium over the silver futures you could sell six hundred and seventy-five of your one-ounce coins and buy a single 1,000 ounce silver bar. This increases your silver holding by nearly 50%. If the one-ounce coins are selling for a 100% premium over the silver futures you could sell five hundred of your one-ounce coins and buy a single 1,000 ounce silver bar. This doubles your silver holding by 100%. Obviously, you will want to keep some of the physical silver on hand “just in case”. But if you do have enough one-ounce coins, you could consider increasing your overall silver holdings by making this ‘swap’ to take advantage of the current price disparity.
Comments and suggestions may be e-mailed to: clientservices@pearcefinancial.com Disclaimer: There is risk of loss in all commodity trading. The data contained are believed to be reliable, but have not been independently verified by Pearce Financial. Accordingly, such data cannot be guaranteed as to reliability, accuracy, or completeness, and as such are subject to change without notice. Pearce Financial will not be responsible for any indirect, compensatory, or consequential damages, including loss of profits which may result from reliance on this data. Pearce Financial and/or its Principals and employees may or may not follow strictly any or all of the trading recommendations contained herein. The risk of trading futures and options can be substantial. Each investor must consider whether this is a suitable investment. Past performance is not indicative of future results.
To learn more about utilizing the silver futures market, contact: Delivery at Pearce Financial LLC, 800.327.8030 or by email at delivery@pearcefinancial.com. Pearce Financial has been servicing futures and derivatives traders, CTA’s & Money Managers since 1986. For more information about our services, call or e-mail us: Pearce Financial, LLC Contact Information |
