Auction Rules, Silver Premiums, and the Fundamentals
( I'm enraptured with God's provision of silver, and his Laws which lead to free market ways )
Silver Stock Report
by Jason Hommel, Jan 10, 2009
I've tried to continue to pursue and discover and apply the very best free market practices. And so, I've updated the method of my silver auctions at www.seekbullion.com
From now on, I'll list my auctions with a starting reserve price at the spot price at the time.
Later, closer to the close of the auction, I'll bid on my own auctions with a new, higher bid at spot, plus my costs. But I will post what my costs are, in the auction. The price of spot silver is nearly always unknown, until the last moment, at the time of the close of the auction. (Except on Saturday, today, because silver does not trade on the weekends.)
Some people suggested starting with the final price of silver, spot plus $2/oz. But spot may go down during the auctions, and I don't want to waste a day with silver listed too high that might not sell.
Some people think that my costs are based on the price I previously paid for the silver, which could have been years ago, or about a month ago. But that's not true. My costs are my replacement costs of buying 1000 oz. bars, and minting costs, and transportation costs..
Some people think that I'm locking in a profit. But that's not true. The price of silver may fluctuate and go up (and I lose), or down (and I gain) between the close of the auction, and the next day when I get wires, and when I place my order for new silver. In a bull market, which I believe we are in, I stand to lose, on average, a tiny bit with every delay on this.
Some people think I have no risk. But that's not true. Besides the "bull market price risk", I have default risk of the 1000 oz. bar supplier, I have transportation risk, I have default/bankruptcy risk of the storage company near the mint, I have more transportation risk, I have default/bankruptcy risk of the mint, I have more transportation risk, and risk of theft at many stages of the entire operation.
Some people think I'm making things too complex. But that's not true. We live in a complex world, one that I did not create, and I'm doing the best I can under the circumstances to be as fair as possible, and to be able to continuously provide silver in a way so that my supplies will never "run out", but always be available to the market at a market based price that both I, and the market, can be happy with.
Tonight's auctions should help those people who cannot afford a full 500 oz. at a time. We are selling 20 individual 100 oz. Johnson Matthey Stamped bars, and each listing has the exact picture of the exact bar. The JM Stamped bars are some of the very nicest bars in my collection. That's why you have not seen them until now.
We also have 3000 oz. of silver, in 500 oz. bundles. 2000 oz. of newly minted silver rounds, and 1000 oz. of the Stamped bars.
Tonight, my bids are $1333 for every 100 oz., based on spot at $11.33, plus $2/oz.
See the auctions at www.seekbullion.com
On Thursday, one man won 9 of my auctions. We spoke for an hour. I wanted to review some of the things we discussed. i urged him to deal his silver, but he was more interested in acquiring more. I suggested buying 1000 oz. bars in bulk, instead, as he definitely has more than enough silver in the form of "small change".
So, we discussed minting costs, and I broke down my costs for him. Minting costs are high today. Some mints with lower costs take way too long to mint silver, as if they are using customer silver as a way to borrow money. I think many mints will end up going bankrupt as the silver bull market continues, and as silver prices head back above $20/oz.
Minting costs are high today, because silver is relatively too cheap in comparison.
Going back over 100 years, minting costs were 1/2 of 1%! And they would cost that much today, too, if silver were $400/oz., and if minting and transportation costs were still only $2/oz.!
But going back to the Great Depression in the 1930's, silver prices were 25 cents per ounce, and the U.S. mint paid that to the miners, yet turned that silver into coinage worth $1.40 per ounce, as there is 0.72 of an ounce of silver in $1 face value of 10 dimes or 4 quarters minted 1964 or earlier.
That kind of minting cost is called "Seigniorage". If the levels of seigniorage in the past existed today, it would be like if the only silver you could buy came from the government and cost $50/oz. even though silver was at $10/oz.!
Although minting costs are too high, that's not a reason to avoid buying silver rounds. It's all the more reason to buy them, as it proves that silver is cheap now. You could wait until minting costs go down in relation to the silver price, but by the time minting costs are only 10% of the silver price, the silver price will probably be over $20/oz., and thus, there is no point in waiting.
Many people keep asking me to discuss the fundamentals of silver. Ok. But they don't change much.
Over 100 years ago, in the late 1880's, Germany stopped using silver as money, going to a pure gold standard. This started an 80 year long trend of silver no longer being used as money. India abandoned silver in the Great Depression, flooding the world with silver that was no longer being used in their coinage. This pushed silver prices down to that 25 cents per ounce level. It had nothing to do with deflation or the depression, it was demonetization. Reduced demand results in lower prices.
Today, no nation on earth uses silver as money.
Thus, monetary demand can only change in one direction. It can only go up, from a baseline, now, of zero. If it goes up, and people start using silver as money, the demand will increase, and prices will increase.
There is another major silver trend, this one 60 years long. Back at the end of WWII, the age of electronics began, and per capita silver usage in the USA increased ten fold, to a level that was sustained even until today. Other nations followed as they industrialized. The age of silver consumption has consumed nearly 1/2 of all the silver ever mined in all of human history. Fortunately, that amount of silver has been mined in the last 60 years, too!
These two tidal forces (one, monetary demand returning, when two, world silver is scarce due to past consumption) will collide, with many others, to drive silver prices way up. Since these two forces are such long term trends, it can be understandable that I was early, by a decade, in my predictions of massively higher silver prices.
The fundamentals about silver are the fundamentals about money.
Today, we are in the age of inflation. Not deflation. Deflation is not lower prices. Inflation is "more money". Today, there is more electronic and paper money due to $8 trillion in bail outs, a $1.2 trillion dollar U.S. deficit, and an additional $1 trillion stimulus plan. Hence, paper prices of things will continue to go up. We are only in the midst of a minor counter cyclical trend, a dead cat bounce, a normal fluctuation, a bit of volatility on the way down in the value of paper money. Today, there is less silver, hence, silver prices will go up. We are only in the midst of a temporary down-spike in the value of silver prices, as silver prices will certainly rebound, and go back up, and exceed all old highs.
People are contacting me now, who have over a million dollars to spend on silver. They have not yet acted, they are still "seriously thinking" about buying. When many millionaires buy silver, what do you think that will do to the price? It must go up. It will go up. I can guarantee it, long term.
I'm 38. I plan to live to age 90. I hope. That means my investment time horizon is over 50 years. Well before 2060, silver will have proven its value. I don't plan to live the rest of my life in 2008, so I don't care that silver was down recently. It just presents a good time to buy silver, real silver, not leveraged silver, so that you can ride out the volatility in a volatile silver market.
I have another apology to make. In 2008, the silver market changed dramatically. The public's attention was drawn to gold and silver in a big way in January and February, with record sales at many coin shops. Then, by March, when gold hit $1000/oz., and silver hit $20/oz., the public's interest really caught fire. The source of silver supply at most coin shops around the U.S. was public selling. But public selling dried up as gold and silver started to go up in a parabolic way. At times like those many people begin to seriously wonder if paper money will vanish like a ghost, and it can.
And so, there were reports of shortages all throughout the year, and there were tremendous delays at many mints. Here now is my apology. Many sources of 1000 oz. bars also dried up. Kitco and Perth and Amark and JM, specifically. Thus, it was natural for me to conclude that if other mints were honest, then it was likely that there was a 1000 oz. bar shortage, too, which I did. I think I was wrong. I think the shortage of 1000 oz. bars was more of a reflection of the near bankruptcy of many of the institutions who used to be able to provide such silver.
But there is another reason that I thought 1000 oz. bars were in short supply. There are position limits and delivery limits at the COMEX. Naturally, they only have those limits in place because they sell more silver in futures contracts than they have silver available to deliver.
Fortunately for me, I found a reliable source of 1000 oz. bars that does not hedge, is not a bank, does not have large positions of futures contracts or options or any significant financial instruments, and has over half a billion worth of precious metals in the form of gold, silver, platinum and palladium.
This one institution's availability of silver does not mean there is no silver shortage. There is a shortage of silver across the entire banking industry, and the shortage of silver in 1964, relative to paper money, is why they stopped making our dimes and quarters out of silver. A silver dime costs nearly $1. That proves a shortage of silver, relative to paper money, right there. Problem with inflation is that it is not revealed all at once. There is always a delay between the crime, and the revealing of the crime. Today, there is well over 100 times as much paper money as there should be. Frauds like that tend to collapse very suddenly, and this is why gold and silver tend to move up in parabolic spikes, when people begin to lose faith in the fraud of the dollar.
The silver market is like Bible prophecy in many ways. The subject is far too large to discuss in one article. This weekend I finally got around to engaging in a rapture debate invitation from a year ago. For those of you who like to follow these things, my opening rebuttal is at: http://www.bibleprophesy.org/dancornerdebate.html
But understanding what the Bible has to say about honest weights and measures in the context of prophecy, is one of the most fundamental things about silver itself. Take a look at the debate, if you have the time.