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The Hidden Profit Inside Silver Eagles

Jeff Clark, Senior Precious Metal Analyst, GoldSilver 
MAR 22, 2019

Most precious metals investors expect to reap a profit on their gold and silver as a result of higher spot prices. 

But what if I told you that when selling certain types of coins, you could gain another layer of profit when you sell? A little leverage on the spot price when it rises.

It’s entirely possible. Here’s how…

I was speaking at a conference in Vancouver in 2011, a time you’ll recall when gold and silver prices were shooting higher. Part of my talk included how bullion investors can recoup some if not all of their original purchase premiums in a strong bull market. To prove it to myself, I took a tube of sovereign silver coins to a local bullion dealer and sold them – and was paid above spot. 

There were a couple of reasons for this.

One was due to the surge in demand at the time. Dealers needed product and offered to pay more to attract sellers.

The second reason is less obvious. It has to do mostly with sovereign mint coins, like Silver Eagles, and it just might answer the question we get a lot from new buyers: Why buy a sovereign coin when they are virtually always more expensive than privately minted rounds?

The Super Silver Secret

If you’ve been around the precious metals industry for any length of time, you’ve noticed that premiums — the amount above spot that you pay for a coin — on silver have risen. They just keep creeping up, especially with American Silver Eagles.

There’s a reason for that. The US Mint.

If you’re unaware, there are typically three fees involved in a bullion purchase.

  1. US Mint surcharge
  2. Authorized Purchaser fees
  3. Dealer commission

The US Mint buys silver “blanks” from a refiner, manufactures the Eagle coin, and then sells it exclusively to an Authorized Purchaser (AP) above the spot price, to cover the costs of making the coin. This fee is called “seigniorage”.

The AP, very few of which do business directly with the public, then distributes the coins to their network of bullion dealers, also tacking on a small fee.

Lastly, the bullion dealer like us here at sells the coin to the retail investor, adding a commission. So when you buy a Silver Eagle (and most sovereign coins) at least three layers of cost are included in that transaction. 

But the rise in premiums for Silver Eagles is not necessarily because dealers like GoldSilver are charging more — our prices are largely dictated by the market, as there are few regulations limiting who can sell a gold coin, and competition is very healthy for it. Nor is the price increase generally due to higher fees from the APs (even as a government-sanctioned oligopoly, the wholesale market is generally healthy in our experience).

The primary reason for the increase in Silver Eagle premiums in recent years has been the seigniorage cost charged by the US Mint.

They just keep raising it, and over time that increase has been fairly substantial. Mike Maloney told me the seigniorage on Silver Eagles is 50% higher today than when he started GoldSilver in 2005.

And that increase, of course, is passed along to customers, making the Eagle that much more expensive to purchase. But, conversely, that increase also sets a new floor on the price of Eagles, generally increasing the amount you can sell them for as well.

Here’s an example of what that increase has amounted to. The first row in the table below shows the total premium we charged for a Mint case (or “monster box”) of 500 one-ounce Silver Eagle coins on August 8, 2008. The second row shows the increase in the total premium over a decade later, on the day I ran the numbers.

You can see from the second line that you’re paying $360 more in premiums today than 10 years ago — even though the silver price is a touch lower. This shows you just how much the US Mint has increased the seigniorage fee. It’s a hidden cost you and I have no choice but to pay if we want this particular coin — the mint sets the market price. 

So if you bought a mint case of Silver Eagles in August 2008, when the spot price was roughly the same, you paid over a third less in premium than what a buyer has to pay today. This is where your second layer of profit potential lies.

The reason that dealer in Vancouver paid me above spot in 2011 was not just because of greater demand, but because they could afford to, based on what he was being charged from the Mint and the AP.

The Potential Explosion in Silver Eagle Premiums

Let’s play this out…

If you believe, like me, that the silver price will move much higher someday... and if the US Mint continues to raise their seigniorage costs (which history shows is a near certainty)... then the investor’s total purchase price for a Mint box of silver Eagles is going to get more expensive, raising that floor I mentioned earlier.

Here are a few scenarios. Keep in mind that it’s the combination of higher silver prices and higher seigniorage charges from the Mint that could push us to these levels.

Even if the mint just maintains its seigniorage at the current level, you would still gain leverage from a higher silver price.

In the second scenario, a buyer would pay — and you as a future seller could get — $3,385 more in fiat currency, if silver hit $50 and premiums rose just 10%, than what they would pay today. They’d be charged $4,020 more if premiums rose 25%. And in a mania where silver hits $100 and premiums rose 50% — well, it just goes up from there.

This is simple math, based solely on potential silver prices and reasonably expected increases in seigniorage from the US Mint. (Of course, premiums could soften again before silver really takes off, which would change these projections, but an increase in premiums — and higher spot prices — are pretty much baked in the cake.)

You may not think premiums could rise by 50%, from 17% to 25.5%. But before you dismiss this possibility, keep in mind that a) this is the very increase Mike has witnessed in seigniorage costs alone from the US Mint over his tenure at GoldSilver, and b) we’ve already seen premiums in this range, and higher, in 2008/09. Silver premiums spiked due to soaring demand — throw in a couple of seigniorage increases from the US Mint between now and then and it is not a stretch to see how premiums could hit these levels, at least temporarily. (And oh, by the way, Silver Eagles may be hard to get then, too.)

The seigniorage increases from the US Mint are why Silver Eagles are more expensive up front, but it is these very charges that also allow us to be paid more upon a sale than what we’d earn on a silver round. The “spread” is actually not significantly different between Eagles and Rounds, because the seigniorage cost is factored into the price dealers pay to buy Eagles back. You pay more now, but you get more back later.

Further, there is the opportunity for a small additional profit. It could come from both higher seigniorage costs and rising silver prices.

  1. The amount of seigniorage the Mint charges could exceed the amount you paid upfront.
  2. Higher silver prices will force the amount of fiat currency required to buy Silver Eagles higher. You can see in the far right column of the table above just how much more cash will be needed to buy a mint box. This extra room is where our potential profit comes from.

The amount we earn above our original premium likely won’t be massive, but the combination of these two factors is why a lot of investors lean towards government-minted rounds (even though the whole purpose of precious metals is a little bit of insurance against the government).

  • For buyers, they will pay more for Silver Eagles due to not just a higher spot price, but also because the premium itself has risen. For us sellers, we’ll realize a profit on both the higher price and the higher premium.

There’s no guarantee of this, of course. It assumes silver hits three figures… that demand spikes again… and that the Mint continues to raise seigniorage fees. At the very least, though, we’ll save money today on both the spot price and the premium, because both are headed higher sooner or later. 

Among the sovereign coins, the Silver Eagle tends to carry the most expensive premium. So while this potential scenario holds true for most sovereign coins, the seller of Silver Eagles is likely to recoup the greatest premium.

You won’t find higher buyback premiums now. But they’re coming. In fact… 

  • In a soaring price environment, there will be competition for buyback premiums, just like there is competition today for sell premiums.

The combination of rising silver prices, rising demand, and rising costs from the US Mint will hand you and I big profits before this is all over. Assuming, of course, you buy now.

I don’t know about you, but I think I’ll place an order for another mint box of Silver Eagles.