SD Friday Wrap: Spot prices may go lower, but trying to time the exact bottom without understanding “premium creep” could prove costly. Here’s why…
I’m not angry as we finish the week.
I’m not upset, and I”m not mad.
I’m just in a daze, a haze, and I’m exhausted.
It has been one of those emotional roller coaster weeks, and I’m worn out.
I did pick up 10 ounces of silver on Wednesday.
I hope everybody picked-up what they could afford as well.
I wish I could have rented a U-Haul and backed it up, but with two kids starting school next week, two kids, they are, who refuse clothes from even Old Navy, suffice to say Ol’ Half Dollar’s bank account is looking a little thin.
Anybody who put serious fiat currency into physical precious metal this week, especially new investors, has been given a wonderful opportunity.
Can gold & silver go lower from here?
Sure they can, but the downside is limited.
Crude oil, after all, is still above $65 a barrel.
Furthermore, if the prices of gold & silver go much lower, there will come a price where physical will vanish from the market, so we’re literally right there, right now, as far how low prices are likely going.
In other words, and let me be clear: For physical gold and physical silver, we’re pretty much at the bottom right now.
Here’s a screenshot I just took from SD Bullion today (follow the blue arrow I added):
Notice the premium?
On a $10 face value of 90% silver coins, we’re talking about $.59 over spot!
In other words – dirt cheap!
That’s a bottom in my book when you combine that premium with a silver spot price of roughly $14.70.
Let me explain premium creep: The lower the price goes, the more physical the people will buy, especially when we’re talking about basically getting something near the cost of production. But it’s not just that it’s something near the cost of production – because after the metal comes out of the mine, it has to be transported, further refined, cast into a blank, and minted into the coin, round, or bar of some sort.
So really, it’s a finish product in hand, investment grade, near the cost of production, from the mine, in a minimally processed form.
So whenever there is a mismatch like that, supply gets scooped up like there’s no tomorrow.
I use the 90% Constitutional silver as an example because the vintage silver coins are some of the first products on the market to get scooped up, in part because the supply is finite.
It’s not like the government can just ramp up production of 1939 Merc Dimes you know.
So it’s premium creep.
I’m taking a long winded way of explaining it, but now I’ll show it to you:
That’s the “Wayback Machine”.
The website is archive.org, and what it does is archive websites.
That is, it takes snapshots of what websites look like on given days. The screenshot above that I made is a snapshot of Apmex taken on September 5th, 2015. The spot price of silver was near where it is today at around $14.50, but notice the premium: on a $250 face value bag of 90%, the premium was $6.49 per ounce over spot.
Compare that to $.59 over spot today, and for a smaller quantity ($10 FV today vs $250 FV in 2015).
You see, generally speaking, as the quantity purchased goes up, that is, the higher the face value purchased, the premium paid over spot goes down, but not during times of premium creep.
So when I say we’re basically at the bottom, I’m referring to the cost for an ounce of physical gold or silver, in hand.
Again, can the spot price go lower?
We could see a 13-handle silver spot price like we did in December of 2015, but that does not mean investors will be able to purchase physical silver at that price.
In other words, the spot price of silver is roughly $14.70, and premiums are very low, but if the spot price of silver drops even further, and if supply becomes tight, an investor could end up paying even more for physical silver than they would have today.
I just showed the example of 90% Constitutional silver, but it goes for all silver (and gold), and the market dynamics of any given product. Recall that in late 2015 (July IIRC) and continuing through the first several months of 2016, the US Mint was rationing American Silver Eagles because they were unable to keep up with the demand.
There is another point to be made here: Things can turn on a dime, no pun intended.
That is to say, while premiums are low and silver is plentiful, supply could dry up from the retail market rather quickly if the price drops further, or even if the spot price stays this low for enough time for investors to realize it’s not going any lower, so they purchase in serious quantity before the spot price really starts moving higher.
If it sounds like I’m mumbling this week, please forgive me. Like I said, I’m mentally exhausted and drained. I just don’t want anybody thinking they can wait until silver drops to $12 so they can purchase some American Silver Eagles, in hand, for $14.75, because with premium creep they could end up costing even more than they do right now ($17, including the premium, at SD Bullion).
So I’m perfectly comfortable sticking my neck out and saying we’ve bottomed, with the caveat that I’m talking about physical ounces in hand of investment grade gold & silver, because if the spot price drops much more, the increase in premiums will offset any savings.
Perhaps the question on everybody’s mind is why did gold & silver “crash” this week?
Well, in part we have Peak Trump.
See for yourself from selected Tweets on the week:
.@GovMikeHuckabee “Your paycheck is bigger, your pension is stronger.” @foxandfriends Unemployment numbers are better than they have been in 50 years, & perhaps ever. Our country is booming like never before – and it will get even better! Many companies moving back to the U.S.A.
— Donald J. Trump (@realDonaldTrump) August 12, 2018
Our Economy is doing better than ever. Money is pouring into our cherished DOLLAR like rarely before, companies earnings are higher than ever, inflation is low & business optimism is higher than it has ever been. For the first time in many decades, we are protecting our workers!
— Donald J. Trump (@realDonaldTrump) August 16, 2018
Just announced, youth unemployment is at a 50 year low! @foxandfriends
— Donald J. Trump (@realDonaldTrump) August 17, 2018
The U.S. has more than double the growth rate than it had 18 months ago.
— Donald J. Trump (@realDonaldTrump) August 17, 2018
Wow! Big pushback on Governor Andrew Cuomo of New York for his really dumb statement about America’s lack of greatness. I have already MADE America Great Again, just look at the markets, jobs, military- setting records, and we will do even better. Andrew “choked” badly, mistake!
— Donald J. Trump (@realDonaldTrump) August 17, 2018
Let that last one sink in.
Now we, but he, “already”, made America great again.
Wow. That was fast. Less than two years. It’s gotta be a record and yes I’m being sarcastic.
Now, I’m not anti-President Trump (I actually voted for him knowing he wouldn’t win El Paso County, El Paso, Texas, anyway), but need I remind everybody of the “big fat ugly bubble”, which is the same “big fat ugly bubble” as before?
Or Candidate Trump calling out of the phony government statistics like GDP and employment/unemployment numbers?
It’s like I’ve said before, until the nation starts coming down off of our collective President Trump sugar high, gold & silver are not going to move much higher.
I do think we’re at the peak right now, but it’s a process.
Case in point:
Today’s @realDonaldTrump approval ratings among black voters: 36%
— Rasmussen Reports (@Rasmussen_Poll) August 15, 2018
Another reason why gold & silver sentiment is so negative right now, and extremely so, is the mirror opposite in the stock market.
You see, with all the economic chaos and market turmoil gripping the entire world right now, not only is the US stock market un-phased by all the financial calamity, but there is a bullish sentiment that is truly epic.
In fact, the S&P 500 is right back to aiming for all-time highs again:
What a farce.
Additionally, complacency right now is like walking through a minefield, but instead of looking where to step, investors are looking at their brokerage accounts on the screens of their iPhones:
Amazing, and farcical.
The yield on the 10-Year Note is pure Goldilocks:
That big drop in yield on the chart was last week, not this week.
And the dollar has surged yet again:
There is clearly a series of higher-lows and higher-highs, so the question is where does the dollar go from here?
Again, just like last week, there are wildcards every weekend now, so it really depends what happens over the next couple of days.
Why do I say that?
Because world changing political coups, drastic changes in global monetary policy, terror attacks and all sorts of those things happen over the weekend, and something in my gut is telling me that we’re overdue for some sort of event.
Crude oil has finally decided what it wants to do:
It wants to say goodbye to its 50-day moving average and go hand out with the 200-day moving average.
We are still sitting above $65, and a whole $20 above where the price for crude oil was a year ago.
Copper started crashing again, but has since bounced:
Copper is also something that we will be watching more closely as Wednesday saw copper more than 20% down from recent highs.
Notice the common theme here?
There are extremes everywhere –
- Extreme bullish sentiment in a stock market that could hit all-time highs again
- Extreme bearish sentiment in gold & silver
- Copper in a bona fide bear market
- Extreme pressures on the emerging markets and their currencies and debts
Platinum really got clobbered between Monday and Wednesday:
It just keeps dropping, and dropping and dropping in price.
Palladium, however, has nearly recovered all of its Wednesday losses:
Let’s not confuse the bounce for strength, however, because from early June on, palladium looks a lot like platinum with the bearish trend of lower-highs and lower-lows.
The gold to silver ratio spiked hard on Wednesday:
Notice the ratio has since come down right into my range of 78 to 80.
Since it was Wednesday when I bought those ten ounces, it looks like I nailed the timing on that purchase, as well as anybody else who bought silver on Wednesday.
I didn’t get to make that purchase at the $14.30s price, but again, what’s a few pennies when the next major move is up, not down?
Gold is closing out the week above the support level of $1183/$1185 that I said gold needed to hold:
It’s too early to tell if this is a relief rally on the way lower again, or if this is a sign that support will hold.
Remember that on Wednesday I said I didn’t think the next support zone in gold was not until $1130, but looking at the Wednesday night spike low of $1167, it seems that if gold drops into the $1160s, and surely into the $1150s, that heavy buying will come in to the gold market and place a bid on the yellow metal.
So downside from here looks limited, but this is a good time to bring up an interesting point: Many analysts are now calling for a revisit of the December, 2015 lows, or that the December 2015 lows are not the lows.
I’m just not so sure we get that low, and especially if we are talking about the price for actual, physical gold.
Look at the theme with the trading volume in silver:
Lately, and certainly this year, those spikes in trading volume come on days where the price gets absolutely clobbered.
So here we are, in late 2018, with the silver spot price exactly where it was in late 2015. Just remember the huge difference: Premiums haven’t crept-up yet.
Trying to time the exact bottom for physical could prove costly.
– Half Dollar
About the Author
U.S. Army Iraq War Combat Veteran Paul “Half Dollar” Eberhart has an AS in Information Systems and Security from Western Technical College and a BA in Spanish from The University of North Carolina at Chapel Hill. Paul dived into gold & silver in 2009 as a natural progression from the prepper community. He is self-studied in the field of economics, an active amateur trader, and a Silver Bug at heart.