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World News See other World News Articles Title: Explanation of Demand Shock on Precious Metals An Explanation of Rising Premiums Most of you are now aware that the inventory of most precious metals dealers has evaporated. Premiums on common products have skyrocketed. I am writing this to offer some insights into these price changes so that you can make informed decisions. I will use the US Mint as the proxy for all mints. What is a product premium? The premium is the markup for a precious metals coin or bar above the spot price. Several factors contribute to a coin’s premium, the most significant of which is the minting (manufacturing) cost. While the underlying spot price of precious metals are tied to financial markets, the fundamental reality is that retail precious metals (coins and bars) are manufactured goods. As anyone familiar with manufacturing knows, to increase manufacturing output by as little as 10% generally requires planning and lead time. Capex, personnel, throughput, raw materials and other factors all create ramp up constraints. For this reason, the US Mint leverages authorized distributors to carry large stocks to help dampen the unique elasticity in the precious metals markets. These distributors purchase Silver American Eagle coins, as an example, from the US Mint at a premium of $2. This premium pays for the manufacturing costs of producing these coins. The authorized purchasers sell to the largest dealers in the U.S. at a slight markup, and the dealers, in turn, sell at a small markup to retail clients. At the largest dealers in the U.S., you can generally expect to pay a premium anywhere between $2.30-$2.60 for a monster box (500 coins) of Silver Eagles, which nets the dealer a small gross profit of generally 1% or less. The fixed manufacturing cost doesn’t change in tandem with the price of the underlying metal. To oversimplify, if the spot price of silver is $2, the premium for the coin will be ~100% over spot. If the spot price is $50, the premium will 4% of spot. Demand Shock The demand experienced industry-wide over the past 5 days has been unprecedented. This is worse than Y2K, 9/11, or the Great Financial Crisis. It is the speed at which demand spiked (seemingly overnight) that has crippled the industry. Volume is up over 10x (in some cases much more) in a matter of days. This has strained customer service, logistics, and - relevant to this article - supply. The industry is built for elasticity. We are used to big spikes in demand. We can handle a 1 or 2 standard deviation move. We can't handle a 5 standard deviation move in 5 days. Distributors sold out of stockpiles in 48 hours. Dealer inventory disappeared immediately. Precious metals are the toilet paper rolls of the financial markets - under appreciated until there isn’t much left. To be sure, there is ample raw material, just like there are plenty of trees to make paper. Getting the raw material into the form that you want is the problem. Knock-on effects To accommodate for depleted inventories, the distributors place desperate orders with mints, which are caught flatfooted, and immediately attempt to ramp up production. This requires insourcing raw materials and beefing up staff. Since a 1,000% output is impossible, the mints create allocations to distributors which are estimated deliveries tied to production (but not certainties) and represent only a fraction of what they need. The distributors forward sell this expected (but uncertain) volume to dealers, and make up any shortfalls by bleeding into expected allocations which are even further out in time. In normal times (i.e. no National Emergency) the allocations are tenuous at best. During a time of rising civil shut-ins, the distributors are selling future production at historic premiums with unknown delivery dates. That is where we stand today. All production from Europe is entirely cut off at this point, which compounds the supply shortage dramatically. The extreme supply/demand constraints spike prices, as dealers are willing to pay much, much higher premiums to secure coins for faster delivery. This is economics 101. The premiums get bid up in the market place. Dealers can afford these higher premiums because customers are willing to pay almost any price to secure precious metals in physical form at the onset of what is now a national calamity and a burgeoning financial crisis. What Does the Future Hold? We now find ourselves on one of two paths. One possibility is that the national crisis blows over quickly, demands subsides, supplies catch up, and premiums gradually return to normalcy (a period likely to last at least two months by current estimates). The other possibility is that shut-ins become pervasive nationwide (as they have in France, Spain, and Italy) halting the entire supply chain for weeks and creating an almost insurmountable backlog of demand. Let’s all hope it is the former. I hope this explanation is helpful. Tarek Saab President & Co-founder Email: tarek@texmetals.com Phone: 361.594.3624 959 Hwy 95N Shiner, TX 77984 Visit our Website texmetals.com Texmetals.com Post Comment Private Reply Ignore Thread Top • Page Up • Full Thread • Page Down • Bottom/Latest
#1. To: Lod (#0)
The only precious metals people seem to care about right now are brass, copper and lead. I see bullets being far more valuable to sustaining life than gold, silver or any other precious metal right now. The reason is that I have been out and about dealing with things and am seeing a lot of people who quite frankly are so fearful that they are arming themselves to the teeth when they have never been armed before. When this is over I think there will be a lot more gun owners and a lot less crybabies to be honest. There’s an undercurrent of fear, and a lot of anger at not only government but the media. The media has ginned this up into an unending fear factory. It has done what the Cold War, Communists and the Nazis couldn’t do. It has destroyed our American Resolve, our ideology of freedom, and most importantly, it has crushed our American courage more than anything I have ever lived through. I miss the America that was. The America that is, is a cheap knock off that breaks when you put it under pressure. I blame the media for all of it, and the social engineering that has gone on for the last 40 years. "Call Me Ishmael" -Ishmael, A character from the book "Moby Dick" 1851. "Call Me Fishmeal" -Osama Bin Laden, A character created by the CIA, and the world's Hide And Seek Champion 2001-2011. -Tommythemadartist
I miss the America that was. The America that is, is a cheap knock off that breaks when you put it under pressure. I blame the media for all of it, and the social engineering that has gone on for the last 40 years. ++++++++++++++++++++++++++++++++++++++++++ I'd say that the social engineering has been in effect for at least 60 years now, and is still accelerating us down the highway to hell. A perfect break-down of our milieu today, just perfect and thank you. “The most dangerous man to any government is the man who is able to think things out... without regard to the prevailing superstitions and taboos. Almost inevitably he comes to the conclusion that the government he lives under is dishonest, insane, intolerable.” ~ H. L. Mencken
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