If silver falls to $40 an ounce, how many people who have been waiting for a better price will finally start buying?
That’s something we talked about when it was approaching $50… you know, that “back the truck up moment”? But what about $40… will even more people jump in? A lot of the attention goes to whether silver can get there. I’m interested in what the physical market might look like if it does. Will we be able to buy rounds and Eagles at $40 spot with the premiums we’re seeing now? Or will enough buyers show up that the premium starts climbing before we get our orders in?
Average premiums have already been creeping up a little over the last week or two. I don’t want to make that sound bigger than it is. The increase hasn’t come anywhere close to offsetting the drop in silver. Physical silver has still gotten cheaper. But it does give us something to watch if prices keep falling.
$40 could get even MORE people interested again
Think about the buyer who wanted more silver but couldn’t get comfortable with the price. Maybe they cut back to a few ounces at a time. Maybe they stopped buying altogether. At $40, they might decide it’s time to pick up that tube they’ve been putting off. I mean that’s what happened when it dropped under $60, and we’re seeing even more people buying at under $50… so what about under $40?
For someone working with a fixed budget, lower prices makes a real difference. They can get more silver with the same money, provided premiums don’t take too much of that savings back. You don’t need a huge rush of brand-new stackers for buying activity to improve. Existing buyers getting interested again could do quite a bit on its own.
That’s why my read on the small premium increase is that renewed interest and buying may be playing a role. The lower price can bring buyers back, and their orders can put pressure on the available rounds and coins. I wouldn’t claim a premium chart proves that demand is rising, but when you combine it with what you’ve been hearing from dealers, both in their shops and at coin shows, it certainly does paint a picture doesn’t it? Example… recently Harry from Silver Dragons was talking about selling out of certain types of Silver quickly, and holes in his showcase, even with prices dropping!
The concern is everybody waiting for the same price
If $40 gets enough people’s attention, dealers could find themselves selling through inventory faster than they are today, and even faster than they’re replacing it. At the same time, many people who own silver will be less willing to sell it back at that price. A shop could have more buyers walking in and fewer sellers bringing silver through the door.
That combination can push premiums higher. Dealers need more product, wholesalers need to fill more orders, and the rounds or coins everybody wants may not be available in the same quantities at the same cost.
Money Metals described that kind of response to falling prices in its Fall 2018 discussion of retail bullion premiums. It’s a useful example of how the physical market can respond, although it doesn’t tell us how strong demand is today.
I wouldn’t expect every product to react exactly the same way, either. Generic rounds and American Silver Eagles have different supply chains and different buyers. If demand picks up faster than available inventory, one could see a much bigger premium increase than the other.
Would higher premiums ruin $40 silver?
Not necessarily. This is where I think it’s important to keep the numbers in perspective.
Here’s a hypothetical example. At $50 spot with a $2 premium, a round costs $52. At $40 spot with a $3 premium, it costs $43. The premium increased by a dollar, but the buyer is still paying $9 less for the ounce. Higher premiums took away some of the savings, but most of it is still there…and that’s the distinction I don’t want to lose when looking at the current bump. Premiums moving up a little doesn’t mean the whole price drop has disappeared.
If you’re following premiums as a percentage, check the dollar amount too. A $2 premium is 4% of $50 and 5% of $40. The percentage went up without the dealer charging another cent over spot. We need to separate that math from an actual increase in the dollar premium before drawing conclusions about demand.
I’m not predicting that silver reaches $40, or that buyers immediately pile in if it does. Some people will wait for $35, some for $30… heck I see comments on the channel all the time of people saying they’re waiting for $20 (is that possible? Sure… although I don’t see how $20 Silver works in the economy, but that’s for another discussion). Others may be nervous about buying while the price is falling. More attention only matters to the physical market if people actually place orders.
But if lower prices bring stronger buying, I would expect premiums to feel that pressure when supply can’t keep pace. That’s my concern with assuming we’ll get $40 spot and today’s premiums together. We might, but I wouldn’t take it for granted.
For now, the small premium increase hasn’t come close to swallowing the drop in silver. If we get down to $40, I’ll be watching how much of that discount is still available on an actual round or Eagle. That’s the price we get to buy at.