Last week, the U.S. Mint sold out of its 2015 American Eagle silver bullion coins, citing a ‘significant’ increase in demand, according to Reuters. This also coincided with the drop in silver spot prices from $15.67 per ounce to a low of $14.62 per ounce last Tuesday. Silver hasn’t seen spot prices this low since 2009!
Given the decline in silver prices, it is not surprising to see the surge in demand for physical bullion. Contrary to the actions of futures traders who normally don’t take delivery of the physical metal, bullion investors tend to buy more when the price declines, viewing it as a buying opportunity. Managed futures traders and other money managers may instead be trading based on momentum or other strategies that are not related to an actual desire to own the physical metal.
The U.S. Mint has temporarily run out of silver bullion coins in the past, as they did last November through the end of the year. In this case however, the Mint said they expect sales to resume within a couple of weeks.
Looking at the American Eagle silver coin sales data on the U.S. Mint’s website, we can see demand has indeed been strong in the past two months. In June, the Mint sold 4.84 million 1 ounce silver coins; 80% more compared to June last year. In addition, July sales of 2.7 million ounces have already outpaced last July’s 1.975 million ounces, despite us being only half-way through the month. However, year-to-date silver sales are still slightly behind last year.
The aforementioned Reuter’s article also mentions the gold-silver ratio, which is simply the price of gold per ounce compared to the price of silver per ounce. When this ratio (or spread) between the two metals changes significantly, one’s natural expectation is that metal prices will eventually adjust again, bringing the ratio back towards its long-term average.
As an individual investor, you can use this ratio if you are trying to decide between buying gold or silver. Of course, owning both metals gives investors diversification and different benefits. Gold is high-value and is usually more stable, while silver has a much lower value and could come in handy for smaller trading transactions.
To construct the ratio, simply divide the price of gold per ounce by the price of silver per ounce. You can easily see the historical ratio by using a free stock charting website which allows dividing one commodity or security price by the other. Alternatively, here is one site that compiles the gold/silver charts for you with different time intervals. As you can see, the ratio hit a high of 78, was pushed down as silver recovered, but is now back up to 76.
Holders of precious metals continue to be disappointed this year, as both silver and gold have slowly declined over the past few months. Gold is down 5% year-to-date, and silver is down approximately 8%. However, the recent strong bullion sales demonstrate that physical demand remains robust. Those who use bullion to save and to store wealth for the long-run continue to wisely take advantage of the recent price declines. Remember, owning precious metals is about insurance and financial security, not about getting rich quick. Instead of worrying about the recent decline, take advantage of the discount the market has handed you and continue to keep a set percentage of your wealth in gold and silver.
Chris Kuiper CFA is currently a student and researcher at George Mason University, pursuing a Master’s of Economics. His previous experience includes asset management, investing and banking.