December 2, 2022

American Silver Eagle Bullion Sales Soar As Investors Buy At Bargain Prices

The US Mint’s latest monthly reports on the sale of American Silver Eagle bullion sales show that investor buying has hit all time record levels.

Total sales of the American Silver Eagle bullion coins in 2010 came in at a record high of 34,662,500.

With over two months remaining in 2011, sales of the American Silver Eagle have already surpassed the record level of 2010 with sales of 36,375,500 ounces.  If sales of the Silver Eagle for November and December match the levels of 2010, total sales for 2011 should total over 42 million ounces or more than 20% above the record breaking sales level of 2010.

A review of sales by month for 2011 indicate solid fundamental buying by silver investors.  Typically, buying of an asset will increase as prices go higher and decrease as prices decline.  This was not the case with the American Silver Eagles – despite a sharp sell off in May and September, monthly sales increased as investors took advantage of bargain prices.

Silver had a volatile year, selling at $30.67 per ounce at the beginning of the year and moving up to a high of $48.70 (as measured by the London PM Fix Price) on April 28th.  Silver closed yesterday at $33.47, up $2.80 or 9.1% on the year.

Based on strong fundamental demand for physical silver, expect silver prices to end the year considerably higher.

For Silver, This Time It’s Different

To many investors with a sense of history, the four most dangerous words are “this time it’s different”. The phrase is usually evoked in an attempt to justify why a huge price gain in a particular asset class can continue to defy common sense and historical valuation norms. A surfeit of explanations on why “this time is different” is usually enough to send seasoned investors to the exits.

Silver, having defied the low expectations of many investors, has now seen a monster rally of 392% from $8.88 in October 2008 to the recent market price of $43.67. The pace of the advance has gone almost vertical with silver gaining 60% from the lows of late January.

Long term silver investors no doubt remember the aftermath of the last rapid run up in silver prices to $48.70 in January 1980. Silver prices collapsed shortly thereafter and ultimately slid to the $5 range where it remained throughout the 1990’s. Silver dropped off the radar for most investors and remained dead money for 25 years before decisively breaking out of a very long base in early 2006.

Will history repeat with another meltdown in silver prices at some near point in the future, or is the rise in silver prices indicative of a major trend change in our economic future? I have never believed that the mechanical application of past price trends was a useful tool for predicting the future. Each point is history is unique with new players and new sets of circumstances. Understanding today’s fundamentals are far more important than ascribing importance to past events that are largely irrelevant.

To understand why silver prices are in the initial stages of a long term super cycle advance rather than a replay of the 1980’s, it is necessary to review the differences of the late 1970’s compared to our current situation. Gold and silver both advanced in the 1970’s as a booming, demand driven economy fueled inflation. The huge cost of financing the Vietnam War, low employment and surging wages all contributed to a steadily rising rate of inflation which peaked at 13.5% in 1981. Federal Reserve Chairman Paul Volcker finally stopped inflation dead in its tracks through a series of massive interest rate increases which brought the prime rate to a high of 21.5% in mid 1981. High interest rates caused a severe recession but by 1983, the rate of inflation had collapsed to 3.2%.

Both gold and silver moved dramatically higher during the inflation surge of the late 1970’s and early 1980’s but the meteoric rise in silver prices was driven by specific events. Wealthy brothers Nelson and William Hunt acquired a massive position in silver in an attempt to corner the market. Prices skyrocketed on the news and silver went from $11 per ounce in late 1979 to $48.70 in early 1980. Regulators did not take kindly to market manipulation and margin requirements on commodities were dramatically raised. The Hunt brothers’  ill conceived attempt to drive silver prices higher collapsed along with their net worth. Silver prices plunged to less than $11 per ounce within two months. The last great silver “bull market” lasted less than six months, driven not by fundamental demand but rather by heavily leveraged speculators.

Fast forward 30 years – the finances of governments worldwide have reached the tipping point under ballooning debt levels and massive deficits. Additional borrowing by insolvent nations to rollover debt simply delays the day of reckoning – more debt is not the solution for too much debt.

The message from the gold and silver markets is clear – governments have reached the limits on borrowing and the day of debt Armageddon is approaching. The accelerating exodus from paper assets to historical stores of value is only in its initial stages as desperate governments take desperate measures to stay afloat (see Smart Money Sees The Perfect Storm for Gold and Silver).

The great debt bubble of the United States and much of the rest of the world is reaching its end game as creditors realize that a stealth default of some type is inevitable via a combination of inflation, money printing, currency debasement and/or negative interest rates.  Nor is it likely that S&P’s lowered outlook on U.S. government debt to negative from stable will have any affect on reining in ballooning U.S. debt (see Why There Is No Upside Limit To Gold and Silver Prices).

From a long term perspective, perhaps this time is not different but simply a replay of the history of currencies backed only by the “full faith and credit” of governments.  Voltaire had this to say regarding fiat money – “Paper money eventually returns to its intrinsic value – zero”.

Price Pullbacks in Silver Becoming Shorter and More Shallow

Silver prices continued streaking higher today on fears of a plunging dollar, rampant money printing by central banks, and talk in Europe of a looming debt restructuring (default) by Greece.

In late afternoon trading silver was up $1.22 to $41.88, a 3% gain for the day.  Since decisively breaking through the $15 price range in early 2008, silver has been in a major bullish uptrend with price pullbacks becoming shorter in duration and more shallow in their extent.

SILVER - COURTESY KITCO.COM

Silver reached an intermediary high of $20.92 in March 2008.  As the financial world headed for a meltdown in late 2008 and every asset class in the world was liquidated, silver experienced a sharp sell off and by October 2008 reached a low of $8.88.  The 2008 low represented a price consolidation of 40% from the base silver had established at the $15 range.

The ensuing recovery in silver took a little over a year before the price once again approached the $20 per ounce level.  In December 2009 silver hit a high for the year at $19.18.  After a brief consolidation below $18 in early 2010, silver broke out of its base in the $18 range  to reach a high of $30.70 in December 2010. The price of silver ended the year up $13.46, for a gain of 78.4% on the year.

In January of 2011 silver again consolidated briefly and pulled back $3.95 or 13% to a low of $26.68 on January 28th.  This month-long pullback turned out to be another fantastic buying opportunity as silver recovered its losses and rose to $36.60 by March 7th.

Over the next 7 trading days, silver consolidated again, declining  from $36.60 on March 7th to $33.88 on March 15th for a loss of $2.72 or 7.4%.  Silver then rallied again to a new annual of $41.37 on April 11th.

Silver’s most recent pullback was the shortest of them all, declining from $41.37 on April 11th to $40.22 on April 13th for a loss of $1.15 or 2.8%. The losses were quickly recovered and a new 31 year high was reached, with silver recently trading at nearly $42 per ounce.

Investors who seized the opportunity to purchase silver on price pullbacks over the past four years have made fantastic profits.  As the bull market in silver has progressed, these pullbacks have become shorter in duration and more shallow in price. This situation seems to be reaching its extreme, where pullbacks last not months, not days, but mere hours. Investors have started to capitalize on even the smallest price declines to increase their positions and drive prices higher.

Proshares Ultra Silver (AGQ) Delivers Huge Gains On Soaring Silver Price

Surging silver prices over the past two years have resulted in huge gains for silver investors. The price of silver bullion has skyrocketed from the $8 level in late 2008 to a New York Spot Price of over $39 per ounce today for a gain of 388%.

Besides directly purchasing silver bullion, other common ways to profit from the silver bull market include investing in silver stocks or silver Exchange Traded Funds (ETF).  The inconvenience and higher transaction costs of investing directly in physical silver has resulted in a major flow of investment dollars into silver ETFs.

The largest silver ETF, the iShares Silver Trust (SLV), has attracted huge investor interest and has seen an astonishing increase in asset growth. The SLV, which held $263.5 million in silver at its inception in April 2006, closed today with total net assets of $13.7 billion. The SLV is structured so that its net asset value per share approximates the value of one ounce of silver bullion. The SLV has worked as it was designed to and the returns are comparable to the return from a direct investment in silver bullion.

There is another silver ETF, however, that has been the standout winner for silver investors.  The ProShares Ultra Silver (AGQ) has soared from its initial $22 a share price in December 2008 to a closing price today of $243.98, providing initial investors with a gain of over 1,000%.   According to ProShares, the AGQ seeks to provide for a single day twice the return of silver bullion as measured by the London Fix Price.  The gain on the AGQ has exceeded the returns on silver bullion, the SLV, and a basket of silver stocks by a wide margin as can be seen below.

AGQ VS SLV AND SIL - YAHOO FINANCE

The AGQ was launched by ProShares on December 1, 2008, trades on the New York Stock Exchange and is defined by the Commodity Exchange Act as a commodity pool.  ProShares is part of the ProFunds Group which manages over $31 billion in mutual funds and ETFs.  ProShares also offers the UltraShort Silver (ZSL) which is a double inverse ETF and the exact opposite of the AGQ.  The ZSL seeks to produce a 200% opposite investment result of a long position in silver and will therefore increase in value if the price of silver declines.

One important element that investors should be aware of is that the AGQ does not hold physical silver, as is the case with SLV and PSLV.  The AGQ seeks to achieve its stated investment objective by owning financial instruments whose underlying value is correlated to the price of silver.  The AGQ may hold various complex financial instruments such as forward contracts, option contracts, swap agreements and futures contracts. As of April 5, 2011, the ProShares Ultra Silver held the majority of its assets in silver forward contracts.

The ProShares prospectus states that ProShares Ultra Silver seeks a 200% return on the performance of silver bullion “for a single day” since returns over periods greater than one day could vary in direction or amount from the target return due to compounding of daily returns.  The four factors cited by ProShares that could result in differences between daily and long term returns are index volatility, inverse multiples, holding periods, and leverage.

As every investor knows, greater rewards usually involve taking greater risks and the AGQ is no exception to this rule.  ProShares uses complex financial instruments that are subject to volatility in order to achieve leveraged results and the Ultra Silver ETF is therefore subject to much greater risk than investments in traditional silver securities.  ProShares warns investors that certain financial instruments held by the AGQ may be “subject the fund to counterparty risk and credit risk, which could result in significant losses for the fund”.  ProShares also notes that the Ultra Silver ETF is non-diversified and entails risks associated with the use of derivatives.

The bottom line is that the ProShare Ultra Silver is much riskier than investing in silver trust ETFs, silver stocks, or silver bullion and should therefore be used only by knowledgeable investors.   As long as silver continues to increase in value, investors are likely to see outsized gains in the AGQ.  Leverage, however, works both ways and a sharp price correction in silver would result in significant losses to investors in the AGQ. An example of how severe losses can be in a leveraged ETF can be seen by looking at the investment results of the ZSL which is designed to go up in value if the price of silver declines.

ProShares introduced the ZSL when silver was below $10 per ounce and, needless to say, initial investors who maintained an investment in the ZSL have experienced devastating losses.  The ZSL has declined almost 50% this year and since its inception in late 2008, has experienced a split adjusted decline of over 95%.

ProShares Ultrashort Silver (ZSL) – Double Inverse Silver ETF

Many of us have been accumulating large positions in silver bullion and silver mining shares. Whether these positions have been held for decades or only for the past year, the recent explosive move up in the silver price has caused some to wonder if there is a way to protect gains from a possible pull back in silver prices.

The bull market in silver has a long ways to go considering the perilous state of sovereign finances, surging commodity prices, and the risk of political and military turmoil in Saudi Arabia. Nonetheless, it is normal for every bull market to experience sharp price sell offs, such as the almost $300 per ounce drop in gold prices during 2008. An experienced investor with a long term view and fundamental understanding of the long term appeal of gold would have used this occasion to increase gold positions in a portfolio.

For investors who may be short term bearish and do not wish to see their portfolio take a steep dive, hedging against a significant short term sell off may make sense and increase overall portfolio returns.

Investors in silver sitting on a 400% gain since October 2008 and wishing to protect profits may consider the purchase of an offsetting position in the ProShares UltraShort Silver (ZSL) to protect profits. Investments in commodities or precious metals can exhibit very volatile price movements. In 2008, the price of silver dropped by 50% in four months, possibly prompting some investors to sell their positions and miss out on the explosive upward move that followed. Hedging volatility to protect large gains without reducing core silver holdings is possible for the average investor by purchasing the ZSL.

The Ultrashort Silver (ZSL) is an inverse ETF that seeks to produce twice (200%) the opposite investment result of the daily price movement in silver. An inverse ETF for silver is therefore a means of profiting from a downward move in silver as measured by the U.S. London fix price. In theory, a 10% drop in the price of silver would result in a 20% gain in the price of the ZSL.

The ZSL trades on the New York Stock Exchange and was launched by ProShares which offers the largest selection of leveraged and inverse ETFs. ProShares is part of the ProFunds Group which has $31 billion in ETF and mutual fund assets.

The ZSL does physically hold any position in silver bullion. In order to achieve a 200% inverse investment result of the price change in silver, the ZSL positions itself daily through the use of financial instruments whose value is based on the underlying silver price. The complex financial instruments used to achieve the ZSL’s investment objectives include swap agreements, forward contracts, futures contracts and option contracts.

ProShares states that the ZSL seeks achievement of the targeted returns for only a single day since investment returns beyond a day can be higher or lower than the 200% inverse investment return objective. According to ProShares, the four factors affecting the divergence between daily and long term investment results are the holding periods, index volatility, leverage and inverse multiples. An investment in the ZSL should be monitored daily since the return for longer periods of time can vary significantly from short term results.

For the investor who understands the risks associated with a double inverse ETF, the ZSL can be a valuable tool to manage the risk of a large investment in silver. The four most common uses of the ZSL (according to ProShares) is to help hedge a silver portfolio, obtain greater profits (or loss) through leverage, commit less cash investment for a specific level of silver exposure, and to reduce exposure to a silver position without a reduction of portfolio holdings.

Ironically, the ZSL was launched near the bottom of the silver market in late 2008 and the investment results have been catastrophic for a buy and hold investor in ZSL. The split adjusted price of ZSL has dropped from $1100 to the mid $20’s as the price of silver soared.  Leverage works on both the upside and downside to magnify investment results and in this regard the ZSL was successful. During 2010, the ZSL had a 77% loss and has declined even further during 2011.

Whether or not the ZSL will be a profitable investment in the future is unknown but it is one investment strategy that can be used to hedge a potential drop in silver prices.

As Silver Prices Soar, Silver Coins Get Smaller

Ten years ago, one ounce silver bullion coins could be purchased for around $7 each. This reflected market silver prices below the $5 level. As recently as one year ago, the prices for one ounce bullion coins had risen to around $18 each. Following the dramatic rise in the silver price experienced in the last five months, newly minted one ounce silver bullion coins from a major world mint are now priced around $39, assuming a purchase in quantity.

Silver has been called “poor man’s gold”, but after the significant rise in price, even the traditionally smallest sized coins are becoming expensive. Thus, it was only a matter of time before smaller sized coins would be introduced.

Last month, the Perth Mint of Australia began selling one-tenth ounce Silver Koala coins. Previously, this series had been offered in sizes ranging from one-half ounce to 1 kilo. Other numismatic and bullion coin offerings from the Perth Mint have also been available in sizes starting at one-half ounce, but this seems to be the first instance that a one-tenth ounce size has been available.

As will generally be the case with silver products, the smaller weight offerings carry a larger premium than than larger weight products. This can be the result of the fixed costs associated with manufacture or volume discounts which may be available for purchases in bulk quantities.

The Perth Mint’s website shows the one ounce 2011 Silver Koala priced at US $41.88, reflecting a premium of $5.57 or 15.34%. The one-tenth ounce version is priced at $13.76, reflecting a premium of $10.13 or 279%! (All prices at time of post.)

Obviously when purchasing silver for investment purposes, it makes sense to pay the lowest premium possible. That way, you will get more silver for your money and won’t risk seeing contraction of premiums offset gains.

The move by the Perth Mint to smaller sized silver coins is certainly an interesting one. How long will it be before other world mints follow suit?