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Silver bullion provides collector opportunities
By Paul Gilkes

Silver bullion is bought and sold in various forms for a multitude of reasons including investment, collecting, diversifying assets or as a hedge against inflation.

Silver ingot for photography provided by Erik Martin. Silver bullion can also be acquired in bar and ingot form, from 100-ounce and 1,000-ounce bars down to 1-ounce .999 fine silver rounds or ingots. Shown is a 5-ounce silver ingot produced by the Northwest Territorial Mint in Auburn, Wash.

American Eagle silver bullion coins are a very popular form in which collectors and investors acquire silver bullion. The U.S. Mint has experienced unprecedented demand for the coins, which have been rationed to the Mint's authorized purchasers since April 21. The Mint has also diverted blanks for Proofs to bullion production.

What form of silver bullion to buy is a common question among those thinking about acquiring quantities of the metal.

According to GoldPrice.org (online at www.goldprice.org), silver bullion is marketed as silver nuggets; bars, wafers and rounds; and as coins.

Silver is traded as a commodity, so its price may change daily, based on supply and demand.

The demand for silver in its various forms has increased dramatically during 2008, especially for government-issued bullion coins, and in particular, the American Eagle 1-ounce .999 fine bullion coins. The U.S. Mint has rationed its inventory to authorized buyers since April 21 because of its inability to acquire sufficient blanks to strike coins to meet demand.

When collectors and investors have been unable to acquire American Eagle bullion coins, they've turned to the silver bullion coins of other countries, as well as to other alternatives such as wafers, rounds, ingots and bars, products usually marked as to weight and silver fineness.

Nuggets are another option, but because weight and fineness of silver nuggets varies, nugget acquisition is the least likely avenue pursued by those seeking silver bullion, according to GoldPrice.org.

Collectors and investors seeking to buy silver bullion often opt to acquire the products that are .999 fine, and marked as such.

Wafers are usually found in sizes of less than 1 troy ounce. The smaller wafers are proportionally more expensive than other silver pieces due to markup and shipping costs. They are usually sold for decorative or aesthetic value, and even as jewelry.

Ingots are usually found in 1-, 5- and 10-ounce sizes, although other sizes may exist.

Bars are usually found in 100- and 1,000-ounce sizes, although there are also troy pound, kilo and other odd sizes as well. Wafers, ingots and bars should be stamped with their proper weight, silver fineness and the hallmark of the manufacturer.

Bullion coins and rounds

Silver rounds and government-issued bullion coins such as the American Eagle, Canadian Maple Leaf and Australian Kookaburra are generally 1 ounce in size and composed of .999 fine silver. Most of the rounds and all the coins bear inscriptions of the weight and fineness.

The price to acquire any of the government-issued bullion issues from secondary market dealers is the spot price of the metal on a given day on the commodities market, plus a mark-up or premium.

The public cannot acquire government-issued bullion coins directly from the mint that produced them. The individual mints distribute the coins through their own respective network of authorized buyers, who in turn, may sell the bullion coins to authorized dealers and the public.

The reason for the indirect selling is the need to provide a two-way market. Government mints do not generally have a mechanism in place to buy the coins they sell. The mints require their authorized buyers to buy back coins in order to maintain a liquid market.

The authorized buyers acquire the coins from the government mints for the spot price of the metal plus an established premium. Premiums charged may differ among the issuing governments. A mark-up is added at each level from the time a coin is sold to an authorized buyer until it winds up in the hands of the end user, either a collector or investor.

The price charged by a dealer will vary for each bullion coin depending in part on the level at which the dealer acquired the bullion coin in the first place.

The level of supply may also affect premiums. In recent weeks, as physical silver shortages worsened, premiums for American Eagle silver bullion coins rose. On Aug. 13 the average premium charged by firms checked by Coin World was 17.6 percent. On Sept. 25, the average premium for the 1- ounce silver bullion coin was 27.7 percent and by Oct. 15 it stood at 44 percent, more than doubling in 63 days.

A number of Coin World advertisers offer bullion coins and other bullion products. For bullion coins, dealers may charge a higher per-coin price for single pieces than they charge for larger quantities of the same coins, thus making it advantageous for a buyer to buy in bulk. Private issuers or mints may also offer their own bullion pieces at higher premiums above the value of metal in them, especially if the rounds are custom-designed pieces.

Silver coins, be they government-issued bullion coins or regular-issue silver coins that once saw circulation, are probably the most popular way of purchasing and collecting silver bullion. Both offer aesthetic appeal for their designs as well as investment value.

Circulating coins

For those who don't mind buying bullion of lower fineness, circulated U.S. coins may be acquired in $1,000 face value bags of .900 fine silver dimes, quarter dollars and half dollars, either in single-denomination bags or bags of mixed denominations, sometimes separated by design type. One can also purchase $1,000 face value bags of Kennedy .400 fine silver half dollars.

The intrinsic or metallic value of the metal in the bags of circulated coins is calculated based on the total weight in pure silver. For the .900 fine silver coin bags, each bag contains roughly 715 troy ounces of pure silver. For the 40 percent silver Kennedy half dollar bags, the total weight is about 295 full troy ounces of silver.

Acquiring .900 fine U.S. coins in mixed denominations and types in $1,000 face value bags serves a two-fold purpose. The coins can be retained in the bag in which they were sold, or examined individually toward the possibility of assembling sets of one or more U.S. coin series.

The .900 fine coins in the bags are likely confined to dimes, quarter dollars and half dollars from the beginning of the 20th century through 1964, the last date on .900 fine U.S. coins issued for circulation. Such bags will likely include 1964 Kennedy half dollars, the only date of that coin struck for circulation in .900 fine silver.

The 90 percent silver bags may contain coins strictly from one denomination or series, or be a mixture of one or more denominations or series. The 40 percent Kennedy half dollar bags contain circulated coins dated between 1965 and 1969. The 1970-D Kennedy silver-copper clad half dollar was only produced for Uncirculated Mint sets and has considerable numismatic value over its bullion value.

One firm's observations

David Hendrickson, president of SilverTowne in Winchester, Ind., said Oct. 7 that the cheapest way to buy silver is by acquiring 1,000-ounce bars. At the time of Coin World's interview with Hendrickson, the premium to buy the 1,000-ounce bars was 30 to 40 cents per ounce over the daily spot price, plus shipping.

The premiums are based strictly on supply and demand, and do change, Hendrickson said.

Because of the sharp demand for silver and their portability, Hendrickson said 100-ounce bars are currently not available.

Any 1,000-ounce bars being sold to SilverTowne are being melted and used to make 1-ounce rounds or ingots or 10-ounce bars. The premium on all three is $1 to $3 above the spot price of silver.

Hendrickson said silver demand is so strong that the firm is selling 100,000 rounds or ingots per day; before the recent surge in demand for silver, SilverTowne was selling that much silver per week.

The Indiana firm both sells bullion items and operates a refinery and mint to produce the pieces.

The SilverTowne Mint has added a second shift to meet production demands, Hendrickson said. Customers continue to place large orders although delivery may not be made for between five and six weeks in some instances, according to Hendrickson.

One recent customer submitted funds totalling $1 million to buy silver, preferably in large bars, Hendrickson said.

On Oct. 7, with silver trading at $11.55 per ounce, the $1,000 face value bags containing 2,000 40 percent silver-clad Kennedy half dollars, measuring 295 ounces of pure silver, had a melt price of just more than $3,400. SilverTowne was buying such bags in the $3,300 to $3,400 range and selling them at approximately $3,700 per bag.

Although the $1,000 face value bags of 90 percent silver coins are supposed to contain roughly 715 ounces of pure silver, the bags could be light several ounces based on the heavy circulation wear of the coins they contain, Hendrickson said.

At the same $11.55 an ounce spot price, the melt price for $1,000 bags of 90 percent silver coins was nearly $8,300, but SilverTowne was paying $9,000 to acquire them for resale, Hendrickson said.

While bags of 90 percent silver coins are often mixed by denomination, dealers that conduct large transactions of bags of circulated silver coins prefer to have the denominations separated and not mixed, to allow for easier counting, Hendrickson said.

Bags containing silver dimes will contain Winged Liberty Head dimes and Roosevelt dimes either alone or mixed. Quarter dollar bags will contain predominantly Washington quarter dollars.

The half dollar bags are offered individually as Walking Liberty half dollars, Franklin half dollars and 1964 Kennedy half dollars, or mixed containing more than one series.

Smaller quantities of circulated 90 percent silver coins can be acquired from dealers, but the premiums will likely be higher than for the $1,000 bags because of the smaller number of coins requested, Hendrickson said.

American Eagle silver bullion coins are in short supply, with investors opting for the silver bullion coins of other countries, such as the Canadian Maple Leaf, when available, he said.

Because collectors' and investors' current appetite for silver is voracious, what form of silver you're able to buy will depend on what silver others have not already acquired.

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