For a few frenzied minutes, while everyone was sleeping, the price of silver spiked 56 cents. Well, at least the West Coast of America was sleeping. It began at 8:30 in New York, where presumably most traders were not sleeping. And of course, it was afternoon here in London (where Monetary Metals just held a seminar). The catalyst was a news release: the non-farm payroll numbers.
$0.56, or 3.8%, is a big move for a whole day. It happened in 15 minutes (and most of the move occurred during 3 distinct minutes).
In addition to the big price move, there is one other fact silver analysts are pondering. There is a real shortage of silver coins.
Let’s digress for a moment. We are not exactly known for our belief in the rumors that often swirl around precious metals. How do we know for sure that coins are scarce? We watch spreads. There is always a spread (called a premium in this market) between coins and spot silver. Here’s a graph of the Eagle premium asked by Monex.
The Silver Coin Premium (Source: Sharelynx)
The spread has nearly doubled since July. An ounce of silver in the form of an American Eagle is selling for around $4 more than the same metal when it’s in the form of a 1000oz bar. That’s up from about $2. A big change.
This paints a picture of a desperate urgency of people to buy silver, but only in the form of coins. To put it in other words, it is a rising preference for coins over other forms of silver.
The obvious question is: does this show strong demand for physical silver metal? Our answer is “yes, but.”
Yes: there is clearly demand for silver coins.
But: the capacity to produce silver coins is inelastic. Manufacturers can only stamp them out so fast (and they have little reason to increase capacity, as they know that demand can dry up just as suddenly as it appeared, but capital equipment has to be amortized over many years).
As coins are bought (and presumably stacked, not to return to the market any time soon), this is demand for silver metal. However, it is like pulling liquid from a large pool through a thin straw. Yes, it’s drawing liquid out of the pool. But the straw can only flow so much.
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