Saturday, June 23, 2012

A Lesson In Silver Investing

In a recent episode of Pawn Stars, a client brought in an impressive amount of silver to sell. This segment of the show provided some insights into why investing in silver can be a smart move.

If you are not familiar with Pawn Stars, it is one of the top cable TV reality shows currently being aired. The scenes take place at a small pawn shop located in Las Vegas between downtown and the start of the Las Vegas Strip (I have driven past the shop on a few occasions but never stopped - there was always too long a line of people waiting to get in). As with all pawn shops, the public is free to walk in to pawn or sell their valuables with some leaving highly satisfied and others having their hopes of quick riches dashed. 

On this particular day, this young man brought in a cart containing 3,372 ounces of silver. He had taken his father's advice to invest in silver about 12 years ago when it was cheap to buy. In studying the scenes, it appears this silver "pile" consisted of 1) one bag of circulated 90 percent silver dimes (715 ounces of silver), 2) one bag of circulated 90 percent silver quarters (715 ounces of silver), 3) ten 100 ounce silver bars (1000 ounces of silver), and one 1000 ounce silver bar (942 ounces of silver) for a total of 3372 ounces of silver.

Just a few comments on the above list. 1000 ounce silver bars are rarely (if ever) exactly 1000 ounces. They are somewhat roughly cast so the refiners stamp the actual weight of each bar along with a unique serial number, purity and the hallmark of the refiner. Because of their weight (just under 70 lbs), investors usually don't take delivery of their 1000 silver bars but pay a reliable financial organization to store the bars for them for a fee. And if they are wise, they only invest in 1000 ounce bars that are allocated or assigned to them by serial number. One last note, if the hallmark or identity of the refiner is well recognized, the silver bars are accepted as good with no testing necessary. If not, the buyer may and should require testing. The hallmark I saw on the 100 ounce bars was Engelhard which is rock solid. The hallmark on the 1000 ounce bar was not clearly shown and evidently required testing by drilling into the bar and testing the shavings with nitric acid. It was good (more info on silver bars can be found at Silver Bullion Bars).

Over what period of time this silver was accumulated was not discussed. But if the majority was purchased about 12 years ago, the seller may have paid about $5 per ounce (a good average for all 12 months of 2000). Let's do the math working with that figure...

$5 times 3,372 ounces of silver = $16,860 initial investment.
Spot price of silver at time of sale was in the low $30's.
Buyer offered close to the spot price, total of $110,901.00.
Final offer was $111,000 which the seller accepted.
$111,000 minus initial investment of 16,860 = $94,140 profit.

This is a nice profit of course but the IRS probably watches this show too and the seller has taxes that must be paid. I believe the $94,140 is treated as a Long Term Capital Gain and taxed as such. And if the seller didn't keep his 12 year old receipts, $111,000 may be the taxable gain (this is my take on it and is not to be considered legal or financial advice).

The burning question is did the seller sell too soon? The current spot price of silver is $26.90. If the price stays under $30 and in a narrow trading range for the next few years, he will look like a genius. On the flip side, if silver goes to $50 per ounce or higher in the next year or two (as many experts predict), he will have lost a bundle. My questions to him would be why now and why didn't he keep some back.

Whenever silver experiences a significant price drop (it is almost half of what it was in April 2011), physical silver becomes a hot commodity. You will have to decide if this price low in silver represents a final buying opportunity before the price takes off to unimaginable heights. As for me, I would not be selling at this time but looking to invest in more. That would include low premium silver bullion and leaving the higher priced, higher grades to others.

By the way, if you are interested in viewing the Pawn Star episode discussed above, you can find it here.

Thanks for reading. 


Sarah Thomas said...

Most of the mining companies have a number of metals that might include silver. It means that the stock of those mining companies will not reflect the gyrations in the silver market in the true sense. What you need to do is to look for a company that exclusively mines silver so this will give you a direct exposure to the silver market and Buy Silver Assets.

James said...

Will you please post a link to your Blog at The Precious Metals Investing Community? Our members will appreciate it!
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Mat Cendana said...

This post is from June 2012 so we have seen how things went. You were right in that the seller would have made more had he waited. The price went to US$35/ounce in Oct 2012. BUT, if he had waited too long in the hope that silver would go above $40, he would have lost out. The worst-case situation would be in him selling in July 2013 when it was at $19. All things considered, I guess he made a reasonable call although I do agree with you that he should have kept some "just in case". Anyway, it's always a tough decision to make when one is buying or selling big amounts - we simply don't know what the future holds.

Anyway, I've been sort of fortunate. Was really keen to invest in silver from around March 2012. But I didn't have the money at that time (had bought shares instead). Silver was at $32... and then went briefly touched $37 a few weeks later. Was annoyed with myself "for missing the boat"... until it went down to $28-26 in June/July. And then there was the very sharp fall from April this year, of course.

Looks like I now have the chance to come in. There's always the possibility it might go below $20 again, of course. However, I feel the current $22 or so is very reasonable. We have seen how volatile silver can be - it may be rather out of favour at the moment but it wouldn't take much for it to go towards $30 and more again. I hope to benefit when it does.