Friday, May 23, 2008

A silver lining 

Demand for silver -- the "poor man's gold" -- has accelerated so rapidly that the U.S. Mint that was producing silver dollars is now rationing them.
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.

Speculators are loading up on silver; I found a bag of $1000 of circulated Liberty halves on eBay for $11,600. Mint coins of course sell for more. The run on silver has moved the gold-silver ratio down to near 50:1, where it has traded north of 80:1 as recently as 2003. The historical mean ratio is around 32 (and monetary historians will tell you about the 16:1 ratio up to 1873.) Silver is a much smaller or thinner market than gold, so when people are speculating on commodities as inflation hedges, silver can outperform gold, as it has the last few years.

The last time there was a real run on silver, the Hunt brothers drove the price to $50/oz. at the end of the 1970s, owning about half of the world's supply. We're not even at $20 yet.

Meanwhile, high oil prices are moving us up on the supply curve.