What IS Palladium?
(Answering a few common questions on bullion)
Silver Stock Report
by Jason Hommel, July 31, 2009
The following is a "story/advertisement" that I plan to publish in about 9 regional papers in the second week of August. As with all paid ads, it will have to carry that ------advertisement------- line at the top and bottom. It is not really intended for you, my well-educated readers on the internet, who have generally found me because you are 1. online, and 2. searching for information on silver/gold, and have read my newsletter for a long time. You will likely find information here to be a bit repetitive, but these are common questions even my readers send, from time to time. Instead, this article is intended as an introduction to precious metals, and as an ad to the General Public who reads newsprint, for the Coin Shop. But I would like your suggestions on how to improve the article, if you have any. Sending in comments like "it's dumb" or "your [sic] dumb" is generally not very helpful. Please be specific.
This is important, because it appears as if advertising to the general public is starting to actually work, for the very first time, in the past ten years. If this works, and if the ad pays for itself, like the last one did, then investment demand may really begin to increase, which is the key to rising prices.
WHAT IS PALLADIUM?
(Answering a few commong questions on bullion)
A common question asked at the Coin Shop is "What is palladium?"
Jason Hommel, the new owner of the Coin Shop explains, "I don't really know exactly myself. I know it's an element on the periodic table, but that doesn't say very much. It's a precious metal, and about 8 million troy ounces are mined and refined each year, which makes it about 10 times as rare as gold. World mines produce about 80 million oz. of gold annually. Most of palladium goes into industrial uses, such as catalytic converters which help reduce car exhaust emissions, so it's a "green" metal, environmentally friendly, but silver colored. Since the price is about $260/oz., which is much less than the $950/oz. for gold, many investors choose palladium, and so we keep it in stock at the shop. While probably none of that answers the question exactly, it is more than enough for many astute investors."
"Another thing people ask us about is the silver content in old US coinage, in quarters, half dollars, and dimes minted in 1964 or earlier. They know the silver content makes the old stuff more valuable, but how much is it worth?
It's confusing, Hommel explains, "The metal content consists of 90% silver, and 10% copper -- that's called the purity level. But one dollar's worth of coinage contains just under 72% of one troy ounce of silver -- that's the measure of the weight. People get the two things mixed up, and they have difficulty with the math, not knowing what amount to multiply or divide against the silver value per ounce.
And there are other things that affect the value, too. Old coinage can be sold in bulk in bags of $1000 face value at a time, and so, there are better prices if you can trade in bulk. But if the coins are very worn out, or if you have only a few coins, you won't get such a good price.
To figure out a rough value, figure that a large bag weighing about 55 pounds, and containing $1000 face value of silver coinage, will have about 715 ounces of silver. Then, multiply the ounces by a percent or two under the spot price of silver, and that's about what it's worth, but even that varies, depending on market conditions. Sometimes, 90% silver can trade above spot, and I've seen it as high as about 30% above spot, but not in today's calm market.
Because many people find it confusing to calculate the value of 90% coinage, most people prefer to own 99.9% pure, 1 troy ounce "rounds" that are a bit heavier than the old silver dollars, that contained about 76% of 1 troy ounce of 90% pure silver. They are called "rounds" because they are privately minted, and not issued by the US government, which would make them coins.
Many people wonder if they own any rare coins in their old coin collections. Most people just own junk. A general rule is that unless it's silver, gold, and a US coin in very good condition, then forget about it. Foreign coins are typically worthless, unless they are silver or gold. Most pennies and nickels are hardly worth the time to look through.
Our "niche" seems to be cash buyers around $1,500 to $10,000. The reasons are determined by governments. California State government levies a sales tax on bullion purchases under $1500, but over that, sales tax is not charged. The Federal government requires a "CTR", or cash transaction report on anything over $10,000, and so many buyers tend to buy just under that limit for the sake of personal privacy. Wire transfers are often used for amounts over that.
People also wonder about dealer markups, or the spread. Gold and silver both cost about 9-10% over the spot price when you buy, and when you sell it back, you can usually get about spot, or maybe 1-3% under. Many people think that's a wide spread, but the true profits for the dealer is often much less, due to the volatility, regular business operating costs such as rent, wages, advertising, minting costs, and the fact that re-ordering inventory from mints or other wholesalers requires placing orders in bulk.
Jason notes that 9% over spot is very cheap. Historically speaking, when silver was the circulating currency during the great depression, the U.S. government bought silver from miners at 29 cents per ounce, and then turned that into $1.40 worth of coinage! That's about a 400% premium over the cost of the silver, so a 9% markup is great by comparison! The difference can be explained by the government monopoly verses the lower costs created by free market competition. The bullion market today is very competitive. Charge more, you lose customers. Charge less, and you risk taking a big loss due to the volatility and all the other costs.
It can cost over $2.00 per oz. just to mint a 1 oz. round at many of the smaller private mints, and today, we have them for $1.50 per oz. over spot! With our narrow spread, and the volatility, and the normal 1-2 day delay of putting cash into the bank to re-order, we lose money on some trades, but that's just the normal risk of doing business.
Jason strongly recommends silver. Why? Most people just don't understand how small the silver market really is. World silver mines produce about 600 million oz. of silver per year, with most of that going to industry. Investors buy only about 100 million oz., but at $13/oz., that's barely $1.3 billion per year. In the scale of world finance, that's nothing. With dealer profits of about 2-3% of that, after costs, the entire silver investment market earns barely $30 million per year, across all dealers, worldwide! Without gold sales, and scrap gold purchases, we'd go broke!
Some people really wonder how we can accept inherently worthless cash for real gold, after all, our shop can't back up all the paper money that the banks have printed up. Well, as long as the families of the miners and the refiners still want and use paper cash to pay their bills, you can still get the stuff. Watch out for the day that the miners decide they want to be paid in silver rounds!
Jason Hommel writes a free internet based Biblical and financial email newsletter with over 80,000 readers worldwide. You can subscribe to the free newsletter, and read prior articles, at silverstockreport.com.
My Coin Shop is one of Northern California's largest bullion dealers and is a national market maker in gold and silver.
Again, please send me your specific suggestions for improvements, or suggetions for future articles. Thank you.
Note to other coin dealers: feel free to copy, improve, edit, re-use, recyle, excerpt any of the text that you like, either with or without attribution to me. But in my experience, if you steal copy, others tend to notice, and it does reflect badly on you. Better to quote with attribution to the source, at least referencing my name, Jason Hommel.
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Or visit www.momsilvershop.com (Mom will ship in lots of more or less than 100 ounces, and overseas, and take credit cards or pay pal.)