What is the Risk that Delayed Physical Silver Deliveries Could Default?


A Special Commentary on Precious Metals Prepared for CoinWeek by Patrick A. Heller – Liberty Coin Services ……

While I was on vacation recently, a long-time friend and customer sent me two important questions. He wanted to know if ordering bullion-priced physical silver for long delayed delivery ran the risk of a default in delivery. He then asked if it would make sense to only offer merchandise that was available for immediate delivery, no matter how much higher the price might be.

The quick answer is that there is a greater risk in default of delivery for product promised for shipment further in the future than if it can be delivered immediately. At some point in the future (which I think could even happen within the next two years), I anticipate a time when it may not be possible to acquire physical silver, almost no matter what price might be offered to purchase it. In such a market, there would be a high risk of default of delivery.

Are we facing a possible default scenario today? The probability is not zero. Yet, I think we are a long way from a broken market today. Here’s why.

In 2008, the price of silver was more than $20.00 per ounce in March. In late July, it was still above $18.00. The London fix was $17.48 on July 31. By August 15, the London fix had fallen to $12.82, a 26.7% decline in just 15 days! The fix fell to $10.66 on September 11. It broke below $10.00 on October 16. Silver reached a low for the year when the fix was $8.88 on October 24.

This dramatic decline in the spot price, more than 55% from the March high, led to a physical buying frenzy. Demand was far stronger than it had been in the past few months. At the peak, buyers were paying more than a 50% premium to acquire US 90% Silver Coins and deliveries of newly fabricated one ounce silver rounds were delayed for four months!

At one point in this buying surge, we purchased $72,000 face of US 90% Silver Coins from a refiner at a price higher than he could realize by refining the metal into pure silver. When customers found we had this supply available, it completely sold out within 24 hours.

From our decades of time in business, my company had established good relationships with most bullion wholesalers across the nation. These long-time wholesalers either owned their own refineries or had strong long-term dealings with major independent refiners. There was enough physical silver to eventually meet demand. The bottleneck was the limited fabrication capacity.

Why was there insufficient fabrication capacity? It is a matter of economics. Silver bullion fabrication is a low-profit operation. Therefore, there is no incentive for the manufacturers to maintain equipment and personnel at a level beyond a baseline constant demand level. If there is a surge in demand, fabricators have little incentive to incur significant capital costs to expand capacity for what may turn out to be a temporary boost in sales activity.

Out of the 2008 silver buying frenzy, the overall silver fabrication capacity has increased, but nowhere near to what would be needed to produce enough coins and bars to meet current demand. However, delivery delays today have not reached the extremes that existed in late 2008.

In normal markets, if one wholesaler runs temporarily short of a bullion-priced silver product, they may be able to pay a slight premium to obtain supply from their competitors. That is not happening right now. Wholesalers can sell anything in bullion silver coins and bars right away to waiting bullion retailers at prices higher than they would charge other wholesalers. Therefore, wholesalers have no incentive right now to help each other out.

I think that the current shortage of Canada Silver Maple Leafs is worse than it would be otherwise because the Royal Canadian Mint recently changed their manufacturing process to incorporate their “Bullion DNA” anti-counterfeiting enhancement into the finished coins. Last month, RCM officials told me that they were setting monthly production records trying to meet demand. That is not the kind of statements they would make if there were risks that the Mint would not be able to eventually supply enough product to meet demand.

From seeing multiple buying surges over the past several decades, I don’t see the need to patronize the handful of dealers who can supply product for immediate delivery—at prices that start about one dollar per ounce of silver (and I have seen some quotes in the $2.00 to $3.00 extra premium range) higher than the delayed delivery prices for the same products. However, there are some measures that buyers can take to reduce the risk of defaults when ordering silver at lower prices for delayed delivery.

My first recommendation is to deal with a company that has a long track record, which I suggest be at least 20 years. Such companies have seen ebbs and surges in the silver market and have more experience managing their business successfully during these times. Dealers with a long track record are also more likely to have strong wholesale supplier relationships and be financially more stable than younger companies.

One thing to keep in mind is that the commodity market “spot prices” only apply to the paper contracts traded on those exchanges. They do not necessarily reflect the prices for physical silver. Back when the price of silver reached $50.00 in January 1980 on the commodity exchanges, it was not possible to sell any silver other than the pure 1,000 ounce bars already in the exchanges’ bonded warehouses at that price. The refineries had acquired so much silver for processing that the fastest they might get to newly received physical silver was at least six months down the road. That meant that it would not be possible to deliver them to a commodities exchange until far beyond the “spot” month. At coin dealerships, other forms of physical silver were being bought and sold at prices far below the commodity market prices.

The prices to acquire physical bullion-priced silver products today are priced significantly higher than the commodity market price. That simply reflects the potential difference between the paper contract and physical silver markets.

Most coin dealers are trying to serve their customers at the lowest possible prices by offering silver coins and bars for delayed delivery. If a buyer is uncomfortable about waiting for delivery, and I understand that sentiment, they can search for a few places to acquire immediately available silver if they are willing to pay an even higher price to get it.

About Patrick A. Heller

pat_hellerPatrick A. Heller was honored with the American Numismatic Association 2012 Harry J. Forman Numismatic Dealer of the Year Award. He owns Liberty Coin Service in Lansing, Michigan and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at NumismaticNews.net (http://www.numismaticnews.net under “News & Articles). His award-winning radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday and Friday mornings on 1320-AM WILS in Lansing (which stream live and are archived at http://www.1320wils.com. He is also the financier and executive producer of the movie “Alongside Night” now available on video.

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  1. I am at a point where buying whole life insurance is not practical and my pastor recommended that I invest in silver as a source of long term gain and a safe investment. I have been buying at least 20 ounces of silver per week, but is there a better way to invest???

    • I think your pastor should stick preaching and you find a trusted financial adviser. I had a friend who put almost all his liquid asset into silver back when silver was going up to around $40 an ounce. The Market crashed and he now has a lose which he cannot recover from. You want safety and long term again diversify your assets but for God’s sake do not put all of your hard earned money into silver you will regret it. Why in the world are you putting so much money every week into something that is not paying you interest or dividends..???


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