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Investing in Junk Silver

Posted By Jim On 01/03/2011 @ 7:10 am In Investing | No Comments

Yesterday, I wrote about how to find the melt value of junk silver [3] after I found a really old silver quarter in a field by our house. As you can imagine, that took me down the rabbit hole of researching investing in junk silver, which apparently is a pretty popular way for main street investors to introduce a little precious metals into their portfolio. Silver doesn’t get as much love as gold because it’s far sexier to talk about something that’s $1600 an ounce rather than something that’s under $30 (plus, gold just has that caché).

Why Invest in Precious Metals?

Gold, and precious metals as a whole, is seen as a safe harbor against economic uncertainty. Whereas the dollars (or whatever currency you have) in your pocket is often fiat money, gold has an intrinsic value independent of the performance of various currencies against once another. What’s tricky to wrap your head around is the idea that gold has value despite having very little practical purpose. You can’t eat a bar of gold. You can’t plant it and grow crops. You can’t shoot it and defense yourself. That said, it’s recognized as a store of value and so people flock to it for protection. If the United States government were to collapse and you fled to another country, US dollars would have no value but you could take gold and convert it to the local currency.

I view precious metals like gold and silver as insurance. In a period of uncertainty, precious metals become more valuable because people are looking for safety. Here’s the tricky part – like any other asset, precious metals are subject to the whims of the market. Gold is valued at around $1600 an ounce. A year ago (Jan 1, 2010) it was around $1100. On January 3, 2000, it closed at $282.20. The USD price of gold has fluctuated with demand, the value of the dollar, and various other factors outside of its intrinsic value. Since we’re in a period of heightened economic uncertainty, gold demands a higher nominal price. On September 5th, 2011, gold was as high as $1896.50 an ounce.

Ultimately, it’s up to you. I haven’t purchased any precious metals, either physically or via an ETF or whatever, so I don’t know 100% the ins and outs of it all. The only thing I’ve done is read up a little on investing in junk silver.

What is Junk Silver?

Junk silver specifically refers to older United States coins (and coins from other countries) that contain silver. Before the Mint changed the metal composition of coins a few decades ago, many coins were made of 90% silver and 10% copper. Since the change, like in 1965 for quarters, cheaper metals like copper and nickel were used to make coins. When you buy it from precious metal dealers, you typically see them in $1000 face value bags, which contain 715 ounces of silver. Many places will sell it to you in smaller bags, like $250 face value and $500 face value, since $1000 face value puts the price at over $20,000 a bag at current prices (silver is around $29 an ounce now).

There are a few reasons why people invest in junk silver rather than going with silver bullion:

  • Truthworthiness: The coins are familiar to most investors and so there isn’t a concern that what you’re buying or selling isn’t what it seems. Whereas a bar of silver could be simply silver plated, and thus must be tested and verified, it’s less likely that someone is minting fake quarters, putting wear on them to make them seem old, and then selling them.
  • Speculative value: During periods of high demand for silver, such as in times of uncertainty, the premium on coin silver can often exceed that of “regular” silver. Since silver bars can be pressed at any time, and there’s a limited supply of these old coins, coin silver can see greater shifts in value (which can be a downside during times when silver isn’t as coveted).
  • Easier to divide up (divisibility): While this reason is probably one of the less significant ones, there is some value in being able to break up your bag of $1000 face value silver into much smaller segments. Take face value of $1 in coins and you know you’re getting 0.715 ounces of silver. Take a quarter and you have even less silver.
  • Lower premiums over spot price of silver: I’m not sure why this is the case (my guess is that it has to do with manufacturing) but you often pay lower premiums for junk silver than for silver bars. I went to a random precious metals dealer and looked up some prices for a comparison. A $1000 face value bag of silver coins is going to be about 715 ounces of silver and can be purchased for $21,728.85 (this is a cash price). You can buy 715 one oz. 0.999 silver bars for $22,472.45, or $743.60 (3.42%) more than the silver coins.

In the end, it comes down to personal preference but that about covers the basics to investing in junk silver. Whether or not it’s a good idea is up to you and your particular financial situation.

(Photo: fornal [4])


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[3] melt value of junk silver: http://www.bargaineering.com/articles/melt-value-junk-silver-coins.html

[4] fornal: http://www.flickr.com/photos/fornal/351993070/sizes/s/in/photostream/

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