Investing in Precious Metals – Silver – What I learned

Greetings my upwardly mobile friends!

Since I joined the personal finance community a couple of years ago, I’ve spent a lot of time researching various investments. While the personal finance community almost universally favors broad based index funds for stocks, a sizable group do advocate investing part of your portfolio in precious metals like silver and gold. I’m always interested in exploring and learning new things so I thought I’d check out precious metals.

I did a substantial amount of preliminary research on investing in precious metals and found that a lot of the lingo associated with them overlapped with the lingo for investing in stocks. In fact, there was a huge amount of overlap in rationale and explanation. In both categories, you find a lot of talk about: 1) dollar cost averaging; 2) savings rates; 3) beating inflation; and 4) automating saving.

Now, I’ve always loved silver American coins (1964 and earlier dimes, quarters, and half dollars) so I decided to dive right in and explore investing in physical silver in the form of these junk silver coins. I bought a little over 100 Troy ounces of silver over a period of two months. I checked out several sources from which to buy silver coins including: 1) ebay; 2) online bullion dealers; 3) those “we buy gold” style pawn shops; 4) local coin shops; and 5) rural estate sales and auctions.

Lesson #1 – Spot Price Is A Myth

This first lesson blew my mind. Despite the fact that silver is a commodity with a publicly listed “spot price,” you will almost never find silver for sale “at spot.” Instead, you, dear reader, will almost certainly have to pay “the premium” over and above “spot price.” Indeed, selling silver “at spot” is most commonly found as a special introductory deal by online sellers for your first purchase and you can only buy a limited quantity (assuming they actually have any silver in stock at this price).

During the entire two month period of my test, I never found any silver actually for sale at spot price. Every seller has a page for it, and everyone always claims they’re out of stock for that deal.

Even “sales” come with substantial premiums over the spot price. The cheapest deal I found from an online bullion dealer at the time I wrote this article was .94 per ounce over spot or more than a 5% mark up spot. Most prices on physical silver ranged from 10-30% over spot.

Despite having traveled to coin shops, gold/silver pawn shops, online bullion dealers, eBay and even rural estate sales and auctions, I never found any silver for sale at spot. It was like chasing a unicorn. Over a 2 month period during which I bought 106 troy ounces of silver, my average cost per ounce was $19.95. As of my writing this, spot price is $18.17. When I started, it was actually as low as $17.19.

So, you’re probably thinking that spot price must be what I could sell silver for to a retail establishment then. You’d also be wrong. Depending on the desirability of the silver item you’re selling, most Retail establishments will pay only 90% of spot. Some very desirable coins can be sold to online dealers for more than spot, but much less than what they charge. In effect, silver coins are worth less the second you pay for them because you almost certainly cannot recoup the premiums.

So, this is the first thing I’ve learned about in investing in silver. You have to pay a premium above its supposed market value just to buy some silver….