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Antiques Are the Anti-Bubble Asset Class

Antiques Are the Anti-Bubble Asset Class

One theme that keeps smacking me in the face again and again over the past few years is just how pervasive our current Everything Bubble is.  It has worked its tentacles into almost every conventional asset class in the market today.  They are all overvalued to some degree, with the worst offenders – the WeWorks, Ubers and Netflixs of the world – totally reliant upon a perpetual stream of fresh investment dollars from zero-interest rate crazed mouse-jockeys in order to continue operating.

So I was intrigued when I read an article on the popular financial commentary site Zero Hedge that introduced me to the concept of anti-bubble assets.  According to this theory, every financial bubble throughout history has also produced an anti-bubble – a boring, cheap asset class that is neglected in the rush for everyone to be part of the historic investing “new paradigm”.

I’ll quote Kevin Duffy, co-founder of the Bearing Asset Management hedge fund and originator of the anti-bubble thesis:

“One of the things we know from past bubbles is that you often get anti-bubbles. This was clearly the case in the year 2000 when you had the new economy bubble on one side, and the old economy anti-bubble on the other side. When tech stocks peaked in March of 2000, a lot of the value stocks bottomed at the same time.”

I can absolutely attest to the validity of this idea, because I experienced it firsthand.  In late 1999/early 2000, I was fresh out of college and new to the financial industry.  When I looked at the markets, it didn’t make any sense to me that Webvan (a money-losing online grocery delivery service) was trading at a market cap of over $1 billion while the staid tobacco firm of Philip Morris was trading at a lowly P/E of 5 and a fat dividend yield of over 8%!

I drooled over the concept of purchasing Philip Morris for the juicy dividend yield, but alas, it was not to be.  Being straight out of college, I did not have two dimes to rub together and nobody was going to loan money to a penniless 22-year old so he could speculate in the stock market.  As you can probably guess, Philip Morris went on to make its shareholders as rich as Nazis while Webvan went bankrupt in 2001.

But this ordeal underscored to me just how hopelessly irrational markets can become in extreme bubble environments.  And our current bubble is no exception.

Today’s Everything Bubble makes the late 1990s dotcom bubble refugees look like chump change in comparison.  Right now Tesla has an improbably large $151 billion market cap.  Netflix sports an eye-watering total valuation of $188 billion.  And Uber, even after being mercilessly punished by the stock market for being a piece of hot garbage, still retains an astounding $60 billion market cap.  Webvan – the biggest failed IPO of the dotcom era – has nothing on our current crop of bubble darlings.

So now that we know where the bubble is, the real question is where is the anti-bubble?  What asset class or classes will allow us to safely double or triple our money over the next 5 to 10 years?

And while there can ultimately be no assurances about future investment returns (as the famous 1930s economist John Maynard Keynes once observed, the market can remain irrational longer than you can remain liquid), buying anti-bubble assets certainly stacks the proverbial deck in our favor.

According to Kevin Duffy, precious metals, short-selling stocks, retailers (Ed. note: in light of the Covid-19 pandemic, going long retailers seems like a busted thesis) and active investing are the mirror images of today’s Everything Bubble.  These are the asset classes/ideas that simply don’t get the time of day from otherwise intelligent, rational investors.

Although I’m not going to take issue with Mr. Duffy’s largely accurate assessment of our broken markets, I would like to extend the definition of anti-bubble assets slightly.  I believe that in addition to gold and silver bullion, antiques, gemstones and fine art have also been wholesale abandoned in the rush to find the next Lyft, Beyond Meat or SpaceX.

Antiques, art and other hard assets are definitely perceived as boring has-beens at this point in the economic cycle.  But I like boring.  The perception that an asset is boring is what allows us to buy it for an obscenely low price.  Boring is what produces outsized investment returns over the course of a decade or two.

And this leads us to my next point.

When bubbles burst, you want to be sure to have some money laying around to take advantage of the bargains that are sure to materialize.  But I’m not convinced it is either feasible or wise to hold a 100% cash position.  This is where having some antiques and hard assets in your portfolio can be invaluable.

You see, antiques, gemstones and art, while not money, all share important similarities to money.  Money must possess five attributes in order to function properly as a medium of exchange.  It must be acceptable in transactions, durable, portable, scarce and easily divisible.

This list got me thinking about an article I wrote a few years ago titled The Five Aspects That Influence Art’s Desirability.  In that article I defined 5 attributes that antiques and fine art had to possess in order to be considered investment grade.  Those characteristics are quality (of materials and construction), portability, durability, scarcity and stylistic zeitgeist (how closely a piece matches the style of its era).

As you can easily see, investment grade antiques share 3 out of 5 of the properties associated with money: durability, portability and scarcity.  Right now nobody cares even a little bit about that fact, but the day is coming when they will.  The Everything Bubble will burst one day.  And when it does, bubble assets will plummet in value.

But people who have the foresight to invest in money-like, anti-bubble assets such as antiques, gemstones, fine art and bullion will do quite nicely.  Conversely, people who don’t buy today’s boring assets will eventually wish they had.

 

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Practicing the Art of Financial Self-Defense

Practicing the Art of Financial Self-Defense

If you live long enough, you get the honor of witnessing some pretty stupid things.  And nowhere is this statement truer than in the arena of investing.

In the late 1920s, know-nothing shoeshine boys were giving their customers hot stock tips.  Everyone knew that the stock market was a sure thing – an easy path to riches.  Only a few years later the Dow Jones Industrial Average crashed by 89% during the Great Depression.

An entire generation of investors was wiped out.

In the mid 1960s, Nifty Fifty companies like Xerox, 3M and Polaroid were widely considered “one decision stocks” – with the only correct decision being to buy (and hold forever).  The DJIA peaked at nearly 1,000 in 1966 during the height of the mania…and then proceeded to move sideways for the next 17 years.

The index only irrevocably surmounted the stubborn 1,000 barrier in late 1982.  Some of the Nifty Fifty names even went on to declare bankruptcy eventually!  So much for buying and holding forever.

In the mid 2000s, people caught house-flipping fever.  Many thought they had discovered the perfect wealth building plan: buy multiple houses simultaneously with no money down and then sell them to some other sucker at inflated prices.  During this time, Ben Bernanke of the Federal Reserve loudly declared that “we’ve never had a decline in house prices on a nationwide basis [since the Great Depression]”, implying that a widespread housing bust simply couldn’t happen.

Over the next decade, nearly 8 million homes were foreclosed on in the U.S., destroying the hopes and dreams of millions.  Ben Bernanke failed upward during this debacle, becoming the Chairman of the Federal Reserve.

In 2017, tech junkies, fraternity bros and anarchists everywhere were enthralled with the idea of crypto-currency in the bizarre belief that all the old rules surrounding money had changed.  But as far as I can tell, a crypto-currency is a digital guarantee that you own nothing…nothing tangible anyway.  Bitcoin, the undisputed king of the crypto-currencies, peaked in December 2017 at nearly $20,000 a unit.

It now trades for just over $7,500 – down over 61% – with the supply of greater fools running increasingly thin.  There will be more losses here for sure.

 

Bitcoin Price Chart

 

In 2020, we are grappling with the largest bubble in history – the dreaded Everything Bubble.  The coronavirus just popped this bubble, but the stock market still hasn’t gotten the message.  When it finally does, look out below.

All of these incidents are historical examples of just how emotionally unhinged investors can be.  It is also an object lesson in why you should practice financial self-defense.  Participating in a bubble can feel wonderful on the upside, but the dream of riches always gives way to the nightmare of reality at some point.

This is why I heavily rely on historical precedent when constructing my personal investment portfolio.  And right now the most undervalued, overlooked asset class by far is portable tangible assets – things like antiques, bullion, fine art and gemstones.

But the concept of financial self-defense also dictates that a portfolio must be well-balanced.  One simply can’t load up on a single asset class to the absolute exclusion of all others.

So in my opinion, the best financial self-defense tactic is to tier or layer your assets.  In this context, tiering your assets means to diversify across different asset types with different cashflow, liquidity and safety characteristics.  This strategy should give you the financial flexibility to buy undervalued assets, while riding out whatever economic disasters may come.

The first asset class vital to the art of financial self-defense is cash.  This can take the form of a checking account, savings account, savings bonds or even physical cash.  Cash is the most liquid of the asset classes and allows an investor maximum financial discretion.  In other words, whoever has a fat pile of cash when a crisis hits will be able to buy investments cheaply when others are forced to panic sell.

Cash is a very underrated asset at the moment.  The stock market has done so well since the last recession that a lot of investors believe that “cash is trash”.  A corollary to this is the misguided notion that you must always be fully invested, usually in an equity index fund.  But this anti-cash stance couldn’t be more unwise.  The ideal time to build a strong cash position (if you don’t already have one) is before a crisis strikes.  The second best time is right now, regardless of the macro situation.

A word of warning though – don’t rely on credit as a substitute for cash.  In a liquidity crisis, common types of consumer credit, such as bank overdrafts, credit cards and payday loans, may very well no longer be available.  As the old saying goes, “A banker will offer you an umbrella when it is sunny, only to take it back at the first sign of rain.”

The second tier of assets in a properly diversified, financial self-defense portfolio is conventional investments.  These include stocks, bonds, mutual funds and ETFs – paper assets that are commonly encountered in IRAs, 401-Ks and brokerage accounts.

Conventional paper assets are generally very convenient to buy and sell.  However, liquidity in this asset class can disappear shockingly quickly in a financial crisis.  But because – pre-coronavirus – it had been more than a decade since our last financial crisis, many people foolishly forgot this fatal flaw of the paper asset markets.

Due to the all-pervading Everything Bubble, I have difficulty recommending anything other than token allocations to most stock and bond sectors at this time.

The third integral part of any financial self-defense plan is real estate ownership.  This is most commonly recognized as owning your own home.  But it can also include owning residential rental properties or raw land.

Unfortunately, due to the Everything Bubble real estate suffers from the same overvaluation problem as stocks and bonds.

That leaves us with the final (and in my opinion best) layer of our financial self-defense cake: portable tangible wealth.  As noted above, this asset class consists of antiques, bullion, fine art and gemstones.  These are items that have been broadly recognized throughout history to possess substantial value, a large portion of which is often intrinsic.

For centuries the middle class and wealthy relied heavily on portable tangible wealth as a discreet and effective store of wealth that could be passed down from generation to generation.  For example, in 18th century Georgian England a house full of art and antiques was considered both a cultural and financial prerequisite for admission into the upper class.

These assets also served as a vital backstop against poverty when all else failed.  Many a European noble family resorted to selling the family silver or jewelry when financial bets went wrong.  Now this outcome might not have been ideal, but it did put food on the table at a time when there was no social safety net.

However, these historical lessons have largely been forgotten today.  Instead, we live in a world where many people put their savings in the stock market, which we are told by the financial media will provide 10% returns from now until forever (hint: it won’t).  Others stay 100% in cash, earning a paltry 1% or 2% a year while inflation eats it all up.

Most households are woefully under-allocated to alternative assets such as antiques and bullion.   Even a small addition to the average person’s portfolio would go a long way to blunting the risks associated with more traditional asset classes.  Financial self-defense counsels us to hold a broad basket of assets, with an emphasis on what is currently undervalued.  So you can feel reassured that when you buy a fine Edwardian diamond pin or a set of sterling silver flatware, history is on your side.

 

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Understanding the Great Silver Shortage of 2020

Understanding the Great Silver Shortage of 2020

Driven by crashing markets and a viral pandemic, March 2020 is proving to be the United State’s deepest financial crisis since the Great Depression.  And that is saying something, considering that the 2008-2009 recession was a near-death experience for the capitalist system.  Global stock markets are plummeting, corporate bond markets are freezing and bid-ask spreads in all asset classes are blowing out in truly historic moves.  And all of this is happening in spite of the fact that the Federal Reserve is printing money as fast as it can.

So it shouldn’t come as a surprise that near-chaos has arrived in the U.S., with people hoarding toilet paper, food and ammunition.  Precious metals have also seen skyrocketing demand in these troubled times, leading to massive premiums for physical gold, silver and platinum bullion.

Silver, in particular, has been in extraordinarily high demand.  In fact, demand for silver has been so high that it wouldn’t be an exaggeration to say that we are currently experiencing a silver shortage of incredible proportions.  Some bullion dealers have simply run out of inventory – an unprecedented event to the best of my knowledge.

Under normal circumstances a large dealer will have hundreds of different kinds of silver products available for sale – everything from government-issued coins to privately-minted rounds and bars of all sizes.  But worried investors have been buying with both fists as the economic situation worsens.  As a result, dealers have had an incredibly difficult time keeping anything in stock.

Let’s walk through some examples of just how crazy the silver shortage has become.

Junk silver, old 90% silver U.S. coins struck before 1965, is front and center in this unfolding disaster.  These coins used to be one of the cheapest (and best) ways to stack silver before the Coronavirus/financial crisis hit.  But now premiums have shot through the roof.  A $1,000 face value bag containing 715 troy ounces of pure silver could be purchased for $12,500 in early March – 12.5x face value.  This represented a premium of about $0.50 an ounce, or around 3% over melt at the time.

By late March that same bag of junk silver cost you $17,800 (17.8x face value).  But the real problem is that the spot price of silver dropped considerably during the month, from around $17 an ounce to only $14.50.  As a result, the premium for junk silver bags exploded to over $10 an ounce – a stunning 70% premium over spot!

American Silver Eagle bullion coins are no less expensive.  Before the crisis hit it was common to find these popular coins for around $3 over spot, or a 17.5% premium.  But now they costs anywhere from $9 to $11 per coin over bullion value.  This comes out to a prodigious 62% to 75% premium over spot.

And this assumes you can find silver to buy at all.  Many silver bars and government-issued bullion coins are unavailable at any price due to a stampede of buyers, coupled with insufficient supply.  In many ways, the present situation mirrors what happened in the precious metals market during the 2008 financial crisis – except on steroids.  Premiums exploded on many silver products back then too.  But the key difference is that our current silver shortage is much more likely to be a long, drawn out affair.

Before I delve into why I believe that is the case, I think it would be useful to examine the details of why we are seeing a silver shortage right now.

The first explanation for our current silver shortage is the collapse of global stock markets.  The S&P 500 experienced a 35% peak to trough decline in early 2020, which is troubling in its own right.  The real problem is that this drawdown occurred over the course of just a single month!  That sort of volatility is unprecedented, especially when you consider that investors had been lulled into a false sense of security by equity markets that persistently wafted higher for years beforehand.

People who were spooked by losing a third of their life savings in the markets in a mere 30 days naturally looked around for more tangible investments to balance their paper-asset-skewed portfolios.  Silver was one of the obvious choices, leading to exploding demand for physical coins and bars.

The next contributing factor to the silver shortage of 2020 is the specter of zero interest rates.  As recently as late February 2020, the Federal Funds rate was still at a (relatively) robust 1.5%.  This meant that prudent savers could expect some return on their rainy day fund, albeit a modest return.

But as the largest market dislocation since the Great Depression tore through the economy, the Federal Reserve went back to one of the only tools it has: lowering interest rates.  The first cut came on March 3rd, when the Fed lowered rates from 1.5% to 1.0%.  As the economic situation continued to rapidly deteriorate, they followed up with a panicked intra-meeting cut to 0% barely two weeks later.

Now we’ve seen this story before.

The first time around was during the 2008 financial crisis.  At that time the Federal Reserve swore up and down that lowering rates to 0% was an extraordinary measure that would be rolled back the moment the economy stabilized.

The Fed was lying of course.

It took them almost 8 long years to raise interest rates off the zero bound.  And during that time savers received no interest on their CDs, savings accounts and money market funds.  This wasn’t an accident.  The Federal Reserve consciously used this immoral policy as a way to recapitalize the criminal, too-big-to-fail banks in the wake of the 2008 collapse.

 

Federal Funds Rate from 2008 to 2020

Here is the federal funds rate from 2008 to 2020. Don’t be fooled by the chart’s deceptive endpoint at 1.5%. The rate actually dropped to zero, but hasn’t had time to be reflected in the chart yet.

 

And like a sick dog going back to eat its own vomit again and again, the Fed is once more resorting to this same discredited zero interest rate trick.

Except this time average people know that interest rates are going to stay at the zero bound forever, or at least until we have a new monetary system in place – whenever that is!

Consequently, smart savers have begun the process of converting some of their savings from dollars into precious metals.  After all, a zero interest rate policy pretty much ensures that any fiat-currency savings you have will shrink in purchasing power over time due to inflation.  So you’re better off buying physical gold, silver or platinum, rather than holding onto steadily depreciating dollars (or euros, pounds or yen, for that matter).

The final reason for the ongoing silver shortage is a little more complex than the first two.  The capital markets experienced a liquidity crisis of epic proportions during March 2020 – an event on par with financial dislocations last experienced during the Great Depression of the 1930s.

This liquidity crisis occurred when levered institutional financial players (like hedge funds) needed to sell assets in order to meet margin calls.  In other words, they had to post additional cash collateral against their outstanding loans as markets fell off a cliff.

Before the crisis hit many hedge funds were loaded up with junk bonds, CDOs, over-the-counter derivatives and other undesirable, illiquid assets.  As these poor quality assets declined in value during the crisis, funds naturally received margin calls on any borrowed money.  But the funds couldn’t sell their really nasty securities to raise cash because no one wanted them.

So instead, hedge funds sold whatever assets could catch a bid.  Unsurprisingly, the assets that remained liquid in the depths of the crisis were few and far between.  In fact, the short list is only two assets long: U.S. Treasury bonds and precious metals, including silver.

Now you might reasonably ask yourself how hedge funds selling silver could possibly lead to a silver shortage.  Well, it can’t…at least not directly.  But it did contribute to the massive divergence between spot prices and the cost to acquire physical silver, leading to exploding premiums.

This is because when hedge funds and other institutional investors buy precious metals, they almost never buy physical metal.  Instead, they purchase paper metal – usually futures contracts.  So when they liquidate silver to meet a margin call, they are actually selling futures contracts rather than real, physical metal.

But the public understandably wants to buy physical silver, not empty paper promises.  As a result, premiums skyrocketed and we found ourselves in the strange situation where the spot price of silver hit an 11-year low under $12 a troy ounce on March 19th while you couldn’t touch American Silver Eagles for less than $20 to $25 a piece.

Now that we know the why of our current silver shortage, we can talk cogently about when it might be resolved.

I have bad news for all you silver stackers out there.  I don’t think we are ever going to go back to the good old days of junk silver selling for $0.25 to $0.50 an ounce over spot.  And I think it will be a long, long time before government-issued silver coins and privately-minted silver rounds and bars are available for less than $2 or $3 an ounce over spot.

The silver shortage is likely to be a long, drawn-out affair.

I base this assessment on a couple different observations.

The first is the sheer magnitude of demand.  Every single bullion dealer has a message on their website alerting customers to product shortages, shipping delays and minimum order increases.  Just read these excerpts from major bullion dealers commenting on the extraordinary situation:

“Demand for precious metals products remains incredibly strong.” – JM Bullion (3/22/2020)

“SD Bullion is experiencing a prolonged period of extremely high order volume. Last week, we received the most orders in the history of our company.” – SD Bullion (3/24/2020)

“Due to unprecedented order volumes, please expect a shipping delay of 20+ business days.” – SilverGoldBull (3/28/2020)

Everybody is buying silver right now…at least everyone who knows the score, financially speaking.  This group understands that while the COVID-19 pandemic has taken a sledgehammer to the economy, the 2020 economic crisis has been a long time in coming.  The Fed spent the last decade meticulously blowing the largest securities market bubble in the history of mankind.  Something was going to pop the “Everything Bubble” eventually – it just happened to be a killer virus that gutted the global economy and revealed the outrageous extent of market overvaluation.

 

Pre-1965 U.S. 90% Junk Silver Rolls for Sale on eBay

(This is an affiliate link for which I may be compensated)

 

Low or inadequate precious metals output is the second major factor ensuring that the 2020 silver shortage will linger on.  For example, The U.S. Mint temporarily sold out of 2020 American Silver Eagles in March.  The Royal Canadian Mint also ran out of Silver Maple Leafs around the same time.  This has helped contribute to the sky-high premiums for government-issued one ounce bullion coins in the market.

Now, these mints can certainly strike more coins, but they are also constrained at the same time.  The entire world is operating under a pandemic watch, which severely limits industrial production.  The U.S. Mint is not exempt from these realities, which could easily curb output at their facilities.  Not only that, but the Mint might run into problems getting the coin blanks it sources from third-party suppliers (most notably Sunshine Minting).

For its part, the Royal Canadian Mint actually closed for two weeks in late March due to the pandemic!  Other precious metal producers and fabricators, both government and private, face similar disruptions.

For instance, South Africa just announced that the entire country (including the mining industry, which produces a significant share of the world’s platinum, palladium, rhodium and gold) will shut down for 3 weeks to combat the spread of COVID-19.  The three biggest Swiss precious metal refiners – Valcambi, Argor-Heraeus and PAMP – suspended operations at their factories near the Italian border in late March.  And individual gold and silver mines too numerous to mention have temporarily closed all over the world due to the virus.

In other words, the production of silver bullion will only come back online slowly and haltingly in the face of overwhelming demand.

This leaves silver stackers and tangible asset investors with one burning question: how do I find and buy cheap silver?  Happily, I still think there are ways to find silver bullion at (relatively) reasonable prices if you look hard enough.

But first a disclaimer – prices and availability is accurate as of late March 2020.  The physical precious metals market is obviously moving very fast at this time, so anything you read here might or might not be true in future months.

My first suggestion is to buy old circulated U.S. junk silver on eBay.  While bullion dealers are charging close to 18x face value (if they have any in stock), you can still find rolls of 90% junk silver for only 15x to 16x face value on eBay (with free shipping in many cases).  This might still be a hefty premium over the (purely theoretical) futures-driven spot price (currently $14.50 an ounce – about 10.4x face value), but it is still one of the best deals out there if you want fractional silver.

My second hot tip is to frequent the websites of micro-foundries that produce hand-poured silver bars.  These works of art usually sell for premium prices on the bullion market compared to generic silver rounds or bars.  But in today’s upside-down world these small silver bar fabricators often have the best prices out there – at least for now.  This includes companies like Vulture Peak Mines, Bison Bullion, Yeager’s Poured Silver and Monarch Precious Metals, among others.

If you want to know more about the world of hand-poured silver bars, you can read an article I wrote called The Investment Case for Hand-Poured Silver Bars.

My final bit of advice for the frustrated silver stacker is to consider buying gold instead of silver.  Right now gold is far more available in the physical market compared to either silver or platinum.

I know, I know.  The gold-silver ratio is hovering around 115 at the moment, which makes the precious white metal criminally undervalued compared to gold.  But that ratio is based on paper prices, not physical prices.  In reality, the gold-silver ratio is closer to 80 or 90 to 1 if you want to buy physical metals (and can find them).  This still skews towards silver as being the better deal.  But those prepared to push forward in their search for physical silver must accept paying premiums over spot of anywhere from 50% to 100%.

Some tangible asset investors simply can’t bear to pay premiums that high.  For those people, gold is the next best thing.  While premiums on gold coins are certainly elevated relative to where they were pre-crisis, they aren’t outrageously high (yet).  For instance, 1 ounce American Gold Eagles are generally selling for between 10% and 15% premiums over spot at the moment.

 

Government-Issued Gold Proof Sets for Sale on eBay

(This is an affiliate link for which I may be compensated)

 

I especially like the government-issued, multi-coin gold proof sets.  These sets usually contain 1 ounce, 1/2 ounce, 1/4 ounce and 1/10 ounce coins for a total of 1.85 troy ounces of pure gold (although this can vary by set; some include a 1/20 ounce coin).  The most well known type is the American Gold Eagle proof set, but Australian Kangaroo, Canadian Maple Leaf, Chinese Panda, British Britannia and South African Krugerrand proof sets can also be found.

The advantage here is that these coins are all proofs, which should normally trade with a slight numismatic premium.  However, because the precious metal market is so unsettled right now it is possible to buy these sets at premiums comparable to regular bullion coins.  So when you buy a proof set today, you essentially get any future numismatic potential for free.

The downside is that these sets are expensive.  A typical 4-coin proof set runs anywhere from $3,300 to $4,000 with spot gold trading for $1,600 an ounce.  Still, it may be worthwhile if you want to invest a significant amount of money.

For those interested in this strategy, you can read a related article I wrote about investing in proof American Gold Eagles here.

The 2020 silver shortage is challenging for all of us who want to preserve our wealth.  So while I understand that the options I’ve given are less than ideal, I hope they offer you some solace.  Unfortunately, our present silver shortage is likely to get worse before it gets better.

 

Read more thought-provoking Antique Sage investing articles here.

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80% Purity Canadian Junk Silver VS U.S. 90% Junk Silver

80% Purity Canadian Junk Silver VS U.S. 90% Junk Silver

Today I’d like to talk about the other junk silver – Canadian junk silver!  This form of silver bullion has most of same advantages that U.S. junk silver has, but often gets ignored by the silver stacking community.  I hope to do my part to correct this by shining a spotlight on this underappreciated silver bullion option.

 

A Short History of Canadian Silver Coinage

The Canadian Royal Mint started striking silver coins in 1858, when Canada was still a British colony.  The initial denominations were the silver half dime (5 cents), dime (10 cents) and 20-cent piece.  This lineup was amended in 1870, when the 20-cent piece was replaced with the quarter (25 cents) and the half dollar (50 cents) was added.  All of these early Canadian silver coins were struck in 92.5% fine sterling silver, just like the silver coinage of Canada’s parent country, Great Britain.

In the aftermath of World War I, both Great Britain and Canada debased their silver coinage due to the expense of the conflict.  However, while Great Britain started issuing coinage in .500 fine silver, Canada only debased its silver coinage to .800 fine.  So from 1920 until 1966, 80% purity was the standard alloy for Canadian silver coins.  Purity further dropped to 50% briefly in 1967-1968 before switching over to 100% nickel in late 1968.  I’ll discuss the messy 1967-1968 end period for Canadian silver coinage later on in this article.

Canada further tweaked its silver coin denominations right after World War I.  The tiny silver half dime was discontinued in 1921, leaving a coin lineup familiar to most people today: the dime, quarter and half dollar.  Canadian silver dollars only came a little bit later, being first struck in 1935

The 80% fine coins minted between 1920 and 1966 represent the bulk of Canadian junk silver that the average silver stacker will encounter in the marketplace.  Pre-1920 sterling Canadian coins generally aren’t found in junk lots because of their higher purity and substantial numismatic value.  So we’ll only concern ourselves with the 20th-century, 80% purity Canadian junk silver in this analysis.

 

The Advantages of Buying Canadian Junk 80% Silver Coins

One of the biggest benefits to stacking Canadian junk silver coins is that their silver content is in easy to calculate round numbers.  A Canadian silver dollar minted before 1968 contains 0.6 troy ounces of fine silver and a Canadian half dollar 0.3 troy ounces, while a Canadian quarter struck before 1967 has 0.15 troy ounces of fine silver and a Canadian dime 0.06 troy ounces.  These amounts apply only to Canadian silver coinage that is 80% fine.  Earlier sterling silver Canadian coins contain more silver, while later 50% fine coins have less silver.

This might seem like a really small detail, but for some stackers it is a nearly indispensable advantage.  It makes calculating the exact amount of silver you have in your Canadian junk silver stack incredibly easy: just multiple the face value by 0.6.  So for example, $20 in Canadian 80% silver coins would be 12 troy ounces fine silver.  $8.25 would be 4.95 troy ounces.  $55 face value would be 33 troy ounces.  The 0.6 multiplier is easy to remember and, depending on your math skills, might not even require a calculator to figure out.

This is a lot better than U.S. 90% junk silver, where the ratios are always frustratingly difficult.  Circulated U.S. junk silver is assumed to contain 0.715 troy ounces per $1 face value, which is not easy to remember or calculate.  The ratio for very lightly circulated or uncirculated U.S. junk silver is even more unwieldy, with each $1 face value containing 0.7234 troy ounces.  There is no figuring these numbers in your head unless you are dealing with a supremely round number, like $10 face value or $100 face value.

Of course the convenient 0.6 ratio for Canadian junk silver only applies to lightly circulated coins, but I’ll address that later in this article.

Another major advantage with Canadian junk silver is that the idea of ever running into counterfeit examples is almost inconceivable.  Much like the country it hails from, Canadian coinage flies underneath the radar.  Because of this, the Chinese counterfeiting rings that churn out fake U.S. coins don’t bother with Canadian coins – at least so far.

I should note, though, that it is also rather uncommon to find fake U.S. junk silver coins.  The profit margins for fakers are simply too low.  There is one notable exception to this rule of thumb, though.  Morgan and Peace dollars seem to be the only U.S. junk silver coins that have enough popularity and numismatic value to spur the production of counterfeit common-date specimens.

So it could be argued that it is almost a wash between Canadian and U.S. junk silver concerning counterfeits, with Canadian silver coinage having just a slight edge.

But there is one area where Canadian junk silver wins hands down over U.S. junk silver.  Canadian silver dollars are typically much, much cheaper than their U.S. counterparts when measured by their premium over melt value.

 

Vintage 80% Fine Canadian Silver Dollars for Sale on eBay

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On bullion dealer APMEX’s website a roll of 20 average circulated Morgan silver dollars was selling (as of November 2019, which was pre-COVID-19) for a jaw-droppingly high 90% premium over its melt value.  A similar roll of Peace silver dollars was selling for a still hefty 37% premium over spot.  But APMEX was willing to sell you a roll of 20 average circulated 80% fine Canadian silver dollars minted between 1958 and 1967 for only a 13.5% premium over melt.

As an added bonus, Canadian silver dollars in average circulated condition will usually be in much better shape than equivalent Morgan or Peace dollars.  This is because U.S. silver dollars are older and circulated for a much longer period of time.  U.S. Morgan and Peace silver dollar production ran from 1878 until 1935, when minting was discontinued due to the Great Depression.  However, the Royal Canadian Mint only started striking silver dollars in 1935 (the same year they were dropped in the U.S.), with the final year of regular-issue 80% fine silver dollars rolling off the presses in 1967.

And any Morgan and Peace dollars you do find in junk lots have almost always been picked over to remove higher grade specimens.  This is because U.S. silver dollars in better conditions (generally XF and above) tend to sell for premium prices over more worn examples.

But this isn’t the case with Canadian silver dollars, giving astute silver stackers a very interesting arbitrage opportunity.  Remember that roll of Canadian silver dollars that APMEX was willing to sell you for just 13.5% over spot?  Well, they will also sell you the same roll in near-mint state AU/BU condition for only a few dollars more.  Even now, these rolls of impressively large silver dollars in near pristine condition sell on the APMEX website for just 20.1% over spot.  This is a criminally cheap price for so-called “junk silver” in the middle of the COVID-19 run on silver bullion products.

Canadian junk silver also offers collectors the possibility of finding numismatically valuable coins.  Although uncommon, it isn’t unheard of to come across overlooked coins in Canadian junk silver lots that are worth 2x, 3x or even 4x their melt value!

In contrast, it is much harder to find numismatically worthwhile coins in rolls or bags of U.S. junk silver, although it does happen on rare occasions.  This is because U.S. silver coins tend to be heavily picked over for valuable specimens, while Canadian silver coins once again fly under the radar.

 

The Downsides of Buying 80% Purity Canadian Junk Silver

One drawback to stacking Canadian junk silver is its potentially limited availability.  While nearly all bullion dealers in North America carry U.S. 90% junk silver coins in their inventory, far fewer stock Canadian 80% silver coins.  In fact, at the time of writing I could only find two major online dealers selling Canadian junk silver: APMEX and SilverGoldBull.  This could very well change in the future, but it does underscore just how difficult it can be to source this type of junk silver in volume.

Happily, there are other venues available for lovers of Canadian junk silver.  Many small online dealers (primarily in Canada) stock and sell the stuff.  And your local coin store might also have some Canadian 80% silver that it is willing to sell for close to spot, depending on the circumstances.  Lastly, eBay often has good deals on Canadian silver coins.

Another complaint about Canadian junk silver is its relative lack of liquidity; there can be wide spreads between dealers’ bid and ask prices.  This means a dealer might charge you a high premium on the coins when you want to buy, but offer you well below spot when you want to sell.

This drawback isn’t set in stone though.  I’ve already documented how APMEX sells Canadian silver dollars for very competitive prices (although this could change in the future, depending on availability).  Well, I’ve also discovered that the well-known online dealer Kitco is normally willing to purchase 80% fine Canadian junk silver for between 3% and 4% below melt value – the exact same rate it pays for U.S. junk silver.  And although this is already a pretty good buyback price, it might be possible to find private buyers who are willing to pay even more.

 

Vintage 80% Fine Canadian Junk Silver Lots for Sale on eBay

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I should also note that Kitco’s buyback price on Canadian junk silver is now (as of mid-March 2020) at an unusually wide 9.9% discount to spot due to the recent turmoil in precious metal markets.

One of the biggest issues with Canadian junk silver is the confusion surrounding 50% fine silver coins that were struck in 1967 and 1968.  While all Canadian dimes, quarter, halves and dollars were minted from 80% silver from 1920 through 1966, things get a bit messy afterwards.  The rising price of silver in the mid 1960s forced the Royal Canadian Mint to debase some of its coinage to just 50% fine.  Even this step ultimately proved insufficient, however, and all silver was permanently removed from circulating Canadian coinage by 1969.

So here is a quick cheat sheet.  All Canadian silver dollars and half dollars were struck in 80% silver through 1967, changing over to 100% nickel in 1968.  There are no 50% fine silver Canadian halves or dollars.

All Canadian dimes and quarters were minted from 80% fine silver through 1966.  In 1967, the Royal Canadian Mint struck them in both 80% and 50% purities.  There is no easy way to tell these different purity coins apart (although testing questionable coins with a CCT silver slide might help).  In 1968, the composition of dimes and quarters was either 50% fine silver or 100% nickel.  A strong magnet will be able to separate these two alloys.

So dealing with Canadian junk silver isn’t so hard in the end.  1966 and earlier coins are all 80% goodness.  1967 halves and dollars are also money good.  Any vintage Canadian coins that stick to a magnet are made from nickel, so they are relatively easy to weed out.  Honestly, the best way to approach 1967 dimes and quarters is just to assume that they are all 50% fine and bid accordingly (if you’re still interested).

The final problem with Canadian junk silver is that it is simply less recognized compared to U.S. junk silver.  A lot of silver stackers buy junk silver in preparation for natural disasters, civil disturbances, economic crashes or other disruptive events where normal payment systems might break down.  As a result, some bullion buyers simply don’t like the idea of stockpiling a form of silver that other people might not recognize or accept.

Of course, if you live in Canada – or even in a U.S. state near the Canadian border – then I think this objection is largely moot.  Most people living in these areas will be at least somewhat familiar with old Canadian silver coinage.

I personally feel that Canadian junk silver can be a great way to accumulate silver bullion, assuming you pay the right price for it.  I’m especially fond of Canadian 80% silver dollars and half dollars, which tend to have less wear and greater numismatic potential than Canadian silver dimes and quarters.  However you want to look at it, Canadian junk silver is the overlooked northern brother of U.S. junk silver.

 

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