Thursday, May 22, 2008

More Bubble Behavior

In an earlier post, I described the action in the oil market as bubble like. It may be that the entire commodity sector is in a bubble. Check out this story from the WSJ about a shortage of silver coins:

The government rationed food during World War II and gasoline in the 1970s. Now, it's imposing quotas on another precious commodity: 2008 dollar coins known as silver eagles.

The coins, each containing about an ounce of silver, have become so popular among investors seeking alternatives to stocks and real estate that the U.S. Mint can't make them fast enough. In March, the mint stopped taking orders for the bullion coins. Late last month, it began limiting how many coins its 13 authorized buyers world-wide are allowed to purchase.

"This came out of nowhere," says Mark Oliari, owner of Coins 'N Things Inc. in Bridgewater, Mass., one of the biggest buyers of silver eagles. With customers demanding twice as many as they did last year, Mr. Oliari would like to buy 500,000 a week. But the mint will sell him only around 100,000.

The coins have a face value of $1. But the mint sells them for the going price of silver, plus a small premium, to a handful of wholesalers, brokerage companies, precious-metals firms, coin dealers and banks. The dealers mark the coins up a bit more and sell them to the public. Currently, the coins are fetching about $19 apiece, with some sellers seeking more than $20.

For Coins 'N Things alone, the shortage is costing hundreds of thousands of dollars in lost sales of silver eagles. The firm sells about $1 billion worth of precious metal every year, including silver, gold and platinum coins. Mr. Oliari, a 50-year-old numismatist who has been in the business since 1973, sniffs: "You can't print what I want to say about the mint."

The mint, a bureau of the U.S. Treasury, has offered little explanation beyond a memo last month to its dealers. "The unprecedented demand for American Eagle Silver Bullion Coins necessitates our allocating these coins on a weekly basis until we are able to meet demand," the mint wrote. A spokesman declined to elaborate.

Silver is not nearly as rare as gold but it does tend to rise in inflationary times as it has recently. But listen to some of the people who are buying:

"Unlike gold, these coins can be bought by regular citizens," says J.R. Roland, a Brownsville, Tenn., judge who recently began buying the coins -- and trading them on eBay. "In these economic hard times, silver coins are a great way to invest."

I guess J.R. hasn't heard about those new fangled ETFs that let you buy gold or silver with one trade.

Linda Wood, a 57-year-old Pittsburgh accountant, scours eBay, coin shops and flea markets in search of silver eagles. One by one, she has accumulated about 300 in the past few months and stores them in a bank safe-deposit box.

Traditional coin collectors may be impressed with the government's written description of silver eagles as "one of the most beautiful coins ever minted." But Ms. Wood isn't in it for aesthetics. She became a silver bug after she and her husband saw the value of their individual retirement accounts decline by $2,500 -- a "significant" chunk. "I just need bullion," she says. "I wouldn't care if the coins were ugly."

So she doesn't care what they look like but she's paying a premium for them when she could just open a brokerage account and buy SLV. That's not rational behavior. You know she's a sophisticated investor because a $2500 decline in their individual retirement accounts was a "significant" chunk. She sounds pretty savvy.

Amid the mint caps, shady silver-eagle hawkers are thriving. Some coins are priced at $25 and higher. Mr. Roland says that he had to wait a month after ordering some on eBay recently, because the sellers didn't even have the goods. "I can't wait long, because you never know what's going to happen with the price," he says.

Old J.R. seems pretty sure about the future course of silver prices. You know it only goes up, like houses.

In Manitowoc, Wis., Dan Zirk, owner of Manitowoc Card & Coin, has sold twice as many silver eagles as he did last year. So he has stashed away his remaining handful of 2008 coins, betting the price will rise. "I want $22 apiece," says Mr. Zirk. He says customers, meanwhile, are asking for earlier years and other forms of silver.

What are the chances old Zirk is still sitting on those coins when the price starts to tank?


Coin Collecting said...

"So she doesn't care what they look like but she's paying a premium for them when she could just open a brokerage account and buy SLV. That's not rational behavior."

Regarding the premium, Silver Eagles always trade at approx spot +$2. When she sells, she will get the same spot +$2. So the premium is a non issue and not really indicative of irrational behavior.

You also left out the end of the article, which strikes an extremely cautionary note recalling the plunge of silver prices in 1980.

Articles written in bubble times rarely harken back to the past tragedies.

Joe said...

Coin collecting,

Will Silver Eagles still trade at a $2 premium if the price drops and everyone tries to sell at the same time? I have my doubts. As for the cautionary tale at the end of the article, I didn't think it was relevant since it references the Hunt brothers efforts to corner the market. That was a much different reason for the price to rise and while some got caught up in it, it wasn't widespread. Furthermore, it is hard to find an article about silver that doesn't reference the Hunt brothers.

You sound as if you really don't want this to be a bubble and that should worry you. The question to ask yourself is whether silver is really worth the current price. Considering that it is not particularly rare, again, I have my doubts. I own commodities too and have for many years, but runups like this really worry me. I will sell regularly on the way up and while I may miss the top, I won't be caught overweight when the bottom falls out. Good luck with your investments.

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