The spread on silver is higher because
it costs the same amount for a dealer to deal with gold and silver on an ounce for ounce basis. There is a high operating cost to run a bullion dealership...you have buy a vault, maintain security, pay for the company overhead, payroll, taxes, ect. It's a tough business with razor thin margins.
But with gold, a 3% spread equals maybe $45.00, where as a 30% spread on silver equals maybe $6.00. A dealer can't afford to collect only 3% on silver, because that would equate to a mere $0.60 an ounce. They just can't operate on that kind of rounding error amount of profit, let alone shave off a thin profit margin.
So, that is
why the spread on silver is greater.
This leads a BUYER of silver to one of two natural conclusions:
- You must buy and hold, at least until a considerable price appreciation, before you sell back to a dealer
- You must sell privately, where there is no spread and you'll sell for a small fraction below what a dealership is selling the same bullion for
However, I would also add this:
the higher the absolute price of silver, the lower the spread will be. Silver at $100 will not have the same spread as silver at $20 (though it will still be higher than gold's) for the reasons described above.
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I have been building a tidy little silver stack for a few years now. It is part of my Variable Portfolio, and is strictly segregated from my PP. My silver bullion portfolio is basically 1/3rd pre-1968 Canadian coinage, 1/3rd Canadian Maples, and 1/3rd American Eagles.
It is a pure speculative play: I'm in silver because its the horse I've bet on, and I think she has a lot of potential to break-away from the pack. Here are some brief points:
- My silver speculative play is a bet on the future of hard assets in general: sovereign debt was the primary harbour of safety during the 2008 financial crisis when the banks were failing, but since then sovereign balance sheets have been infected by the same contagion that people fled from in the first place. I believe during the next major crisis, capital will flee to hard assets because government debt might actually be trigger of the crisis in the first place.
I'm using silver as my vehicle for making this bet, because I believe that it has better upset potential than gold.
- Silver-to Gold Ratio: I think that on a historical basis, the silver-to-gold ratio is totally out of wack. For most of history silver and gold were valued at a range of 1:10 to 1:20 ounce ratios. In recent history, that ratio has been 1:50 to 1:100. I'm betting on a massive reversion to the mean, which I predict especially during a crisis where hard assets are the destination of safety, as gold becomes out of reach for the average investor, driving them naturally to silver.
- Silver's Industrial Use: Silver is often criticized as an 'investment' because it has become primarily an industrial metal, and has faded as a monetary metal. But this is exactly why I believe that there is a major opportunity in silver: it has been trashed for decades, massive quantities of it being lost irrecoverably to industrial use and consumer products. Now, here is the crux of my argument: I believe that the monetary use of silver has potential to return, and because so much of the world's supply of silver has been lost to industrial use, its value would have to rise significantly to reflect the increased rarity.
Silver has been used as money for as long as gold has. I own a Roman Denarius, for example. I can hold in the palm of my hand an actual coin that was used by people two thousand years ago as money, and which survives to this day. It has been a form of inter-civilizational money for longer than some civilizations have existed. I don't believe that humanity will just
forget that silver is a trusted form of hard money in the event that there is a crisis of confidence in government paper. It is almost silly to just dismiss silver's monetary utility because of a few decades of humanity not valuing it as such, when there is a millennial, inter-civilizational, cross-cultural legacy of silver being valued and used as money.
Should there be a major crisis of confidence in government fiat and paper markets, it will be hard assets that win the day, and physical precious metals that serve as the harbour of safety that capital will flee to. Gold will be a winner, yes. But I believe that silver is a sleeper. It has been dormant for so long, trashed as an industrial metal for decades, and yet it remains the most accessible, practical form of precious metals that the average investor can get into, especially in the event of a crisis when gold may be accessible only to the rich.
It seems like everyone hates silver, even people who love precious metals. The contrarian in me delights.
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Now, full disclaimer: THAT IS ALL SPECULATION! Maybe silver really is dead, permanently, as a monetary metal. Maybe during the next crisis banana peels will be the asset class that everyone flees to. I don't
know, and that's why the majority of my capital is held in the Permanent Portfolio matrix. But I also can afford to take on some risk, and with the money I can afford to speculate with, SILVER is the one asset class that I'm interested in making a bet on.