I want to buy silver in South Africa. Which product should I purchase?
Before I endeavor to shed some light onto this question, it is important to emphasise that I am not qualified to give financial advice. This blog article is simply a humble presentation of my own thoughts, opinions, and practices in terms of my own personal physical silver bullion investment strategy.
So, if you have made a decision to purchase physical silver bullion, congratulations! I suspect that this decision will, in hindsight, prove to be a wise and sensible choice in the long term. Likewise, well done for not rushing into making a purchase, but rather, seeking to research and make an informed decision.
Thus, the answer to this question may depend on a number of factors. For example, do you wish to make once-off a ‘large’ purchase? Do you wish to make a large purchase initially, and then add to your position regularly? Perhaps you want to enter cautiously and simply make periodic purchases in order to take advantage of average costing over a long period of time? Whatever your strategy may be, my personal recommendation relates to the 60/40 principle of demand, recognisability, and diversification. This is not a mainstream economic principle per se, but my experience of the silver market over the past 5 years.
In short, a balanced silver bullion portfolio should contain 60% American Silver Eagle Coins, Canadian Silver Maple Coins, and South African Silver Krugerrands (not 2017, but the 2018 coins, if you have questions about the difference, read more here) and 40% other legal tender coins, bars, and rounds of various sizes minted by internationally recognised and trusted private mints.
The 60%/40% ratio is not an objective percentage for all people in all places who purchase silver, but rather, my own subjective allotment based on five years of selling/trading in Johannesburg. That is, in a typical month or year of trade, at least 60% of my total volume is made up of American Eagles and Canadian Maples, while about 40% is made up of other legal tender coins, bars, and rounds of various weights. Thus, it makes sense that I would endorse this ration of ownership, for should you ever decide to offload your silver position back onto the market, you have a portfolio that best fits the demand dynamic of the secular market (as I experience it as a trader). Moreover, should you decide to offer to sell your silver back to us, again, you have a portfolio that best fits the demand dynamic of my clientele.
A few thoughts on why I am such a strong advocate of the Eagle, the Maple, and the Silver Krugerrand. My business model concerning product range is not rooted finding and then subsequently pushing and marketing a particular silver bullion product. Rather, I import silver bullion products that are trusted and in high demand both nationally and internationally. The Eagle and the Maple coins are by far the two most favoured bullion coins in the world. Nothing comes even close in terms of numbers sold. For example, the US Mint produced and sold over 45 million Silver Eagles in 2015, while the Royal Canadian Mint sold over 30 million Silver Maples. For this reason, therefore, I propose committing at least 60% of your silver bullion portfolio to these two silver coins. After all, it is simpler to find buyers for these two coins than other lesser favoured coin or other semi-numismatic type of bullion coins like the Australian Silver Kookaburra, or the Chinese Silver Panda.
A qualification, if I may. I am in no way saying that you should abandon other types of bullion coins. Both the Kookaburra and the Panda have gained a rather healthy collectable premium on previous releases. I am simply suggesting that, firstly, the bulk of your portfolio contains the two products which are in the highest demand. But secondly, should you decide to re-sell your silver back to me, you have a ratio that is similar to my sales demand ratio. For example, should you offer to re-sell a monster box of 500 American Silver Eagles, I would almost certainly say yes (even if I ask you to give me a few days to deplete my stock before we go ahead with the trade). I sell numerous monster boxes each week, so the chances are, I will need to replete my stock weekly. But if you offer to sell back 500 Chinese Pandas, it is likely that I would only take 50 to 100 at most, since I sell about 100 Eagles and 100 Maples for each Panda. Hence, rather own bullion items that are in high demand, as this will make it more likely that I will buy back from you in the future.
Finally, the 40% of your silver portfolio should consist of other popular and trusted bullion items like legal tender coins (e.g. Austrian Philharmonic, Australian Kangaroo, British Britannia, and so on), 1 oz American Buffalo Round, Sunshine Mint 1 oz and 10 oz silver bar, 10 oz Geiger Security Bars, and if you have a sufficiently large silver bullion portfolio, 100 oz bars from the Royal Canadian Mint or the Republic Metals Corporation.
In conclusion, the above thoughts are by no means universally objective (other bullion dealer may provide dissimilar advice based on their own demand data). They are merely my own humble personal opinion formed over the past number of years of trading silver. However, I think that the 60/40 ratio is reasonable; (1) it represents a position that aligns with demand as I experience it through my business, (2) it contains trusted and recognised products, and (3) it is sufficiently diversified in terms of both products and weight to ensure full exposure to the silver market.
Where will my silver be stored?
The silver will be stored with Knox Titanium Vaults, in Killarney.
Is my silver insured?
Yes, Silver-sphere Trading and the content held on the behalf of our clients is covered by Art Insure, who are underwritten by Hollard. Art Insure is a specialist insurance company that covers works of art, collectibles, and valuables (like coins and bullion).
What type of storage do you offer?
The storage is allocated; meaning that your precious metals place into storage will be deposited with your name clearly visible and will be completely segregated from any other customer products which are stored at the same vault.
How much does it cost?
The service and administration fees for storage is 1.5% of the total value per year, or, 0.125 % per month of the total market value of your stored precious metals (calculated on the day of deposit) for R499,000.00 or less, and 1,25% per year of the total value for R500,000.00 or more in precious metal value. Fees for storage are calculated based on the total value of your holding on the day of purchase (in cases in which no delivery is taken and the silver or gold is sent to storage directly), or on the day in which your precious metals are deposited into our vault. For example, if you wish to store 500 Canadian Silver Maple 1 oz coins each valued at R300 on the day of deposit, your yearly storage will be R2,250.00.
This pricing structure is in line with the best rates for international bullion storage. Essentially, the fees are less than a typical cash deposit fees into a banking account.
Are your prices competitive?
Absolutely. It is more cost effective to store your silver with us, than it may be to rent the space yourself. For example, storage space to store 500 ounces of silver will cost R3500.00 per year. To store the same amount of silver with Silver-sphere, the cost is significantly less.
But there are a few other issues to consider that makes storing your precious metals with us ideal. Firstly, the cost of insuring your precious metals with your own insurer as part of your household will most likely be pricier than the 1.5% yearly admin costs charged by Silver-sphere Trading. Secondly, insurance companies may require the purchase of a CAT 2 safe or higher, which costs well over R5000.00 (small gun safes are usually too flimsy and easy to break open. Thirdly, in the case of an armed robbery, it is safer to store your metals off-site.
How do I pay for my storage?
If you wish to pay for storage of your coins or bars at the point of purchase, we will add the storage costs onto your purchase invoice (1.5% of the total value). An invoice will then be sent to you two weeks before the end of the 12th month for renewal, with an up to date evaluation.
Can I store previously purchased coins or bars from Silver-sphere?
Yes. If you wish to store coins that you have previously purchased from us, you may courier them back to us for storage. The courier costs will vary depending on weight and value. Please contact us should you wish to discuss this further.
What about coins purchased from another dealer?
We do not offer storage services for coins purchased from another dealer. We also do not store other personal valuables.
What is your minimum storage period?
There is no minimum storage time. However, payment towards your precious metals storage is for a 12-month period, paid upfront in full. At this time, we do not offer monthly debit order facilities. While clients may withdraw their precious metals any-time (except Sundays, and Public Holidays), funds will not be refunded pro-rate, should a withdrawal be made before the full 12-month period is realised.
What is the minimum number of ounces can I store with Silver-sphere?
At this time, the minimum number of ounces we are willing to store is 20 ounces of silver and 1 oz of gold. For silver coins, the twenty ounces of silver may not be made up of various types of coins and bars, but should be a full tube of a particular type of coins or round (for example, a full tube of American Silver Eagles, or Canadian Maples).
How do I take possession of my precious metals should I want it in-hand?
You can request delivery of your stored goods at any time by simply calling (0825542375) or emailing us (email@example.com). Please note that we require 5 working days’ notice that you wish to take possession of a portion or all your stored precious metals. This is to provide us sufficient time to organsie secure collection from the vault. We will then courier the metals to you, door-to-door (fully insured) at a minimal cost (quote to be supplied). Courier services are usually overnight once collected from the vault.
To whom may give notice of withdrawal?
You may nominate an additional person that may request withdrawal of your precious metals from our storage. This would require the same set of documents as outlined further in this document.
What if I want to sell back some of my silver and/or gold?
If you store your silver and gold with Silver-sphere Trading, selling your precious metals back to us would be hassle-free and safe. You simply tell us what quantity / type / amount of metal you wish to sell back to us, we then make an offer, and if accepted, we make payment and remove it from storage. Should you sell only a portion of your silver or gold, the portion that is left in our vault will continue to be covered for the remainder of the 12-month period.
For more information on our trade buy-back policy, visit our website, here: https://www.silver-sphere.co.za/trading-buy-back-policy/
What documents do you need?
We require proof of residence, copy of your ID, and the Silver-sphere agreement and declaration form.
How do I check my holding in storage?
Contact us at any time and we will provide a ledger of your holdings in our vaults.
May I collect my goods from storage personally?
Due to various security reasons, it is not possible to collect your precious metals from the Knox Vaults directly, since non-account holders are not permitted into the vault area. Thus, the options are to collect from our offices, or to use the courier option.
Since the news has hit social media that a first ever bullion silver Krugerrand release is on the horizon, we have been inundated with emails and phone calls. While the general market interest has been excellent, the misunderstanding and lack of clarity about this product seems to be widespread. In this blog article, I will attempt to bring some clarity about this ‘new’ product, and answer some of the typical questions investors have asked over the past couple of weeks.
Is this really a new product?
Yes, it is a new product. It is the first ever bullion silver Krugerrand release that is aimed squarely at silver investors rather than collectors. This difference is important to understand. Last year, the SA Mint released a 50th anniversary silver Krugerrand, which is a high premium commemorative coin with a limited mintage of 1 million. The name given to these coins was premium uncirculated. Since its release, this coin has been trading for anywhere between R550.00 each, to well over R1000.00 each.
In addition, the SA Mint has also released an even higher premium proof Silver Krugerrands with a maximum mintage of 15,000 coins. It comes in a box and a certificate of authenticity and it trades for over R2,000.00 each.
However, the 2018 silver bullion Krugerrand is a release issues by a Rand Refinery and SA Mint partnership, and it is pitched to compete against other world renowned and recognised bullion coins, like the American Silver Eagle, the Canadian Silver Maple, and the British Silver Britannia, which are all characterised by low manufacturing costs and unlimited mintage.
It is therefore important to understand that the 2017 silver 50th anniversary Krugerrand is not in the same category as the 2018 silver bullion Krugerrand because they are high premium special issue coins that are limited to a definite mintage.
Am I an investor or a collector?
While most of my clients do not ask this question outright, the typical questions that I get certainly demonstrate that the difference between collectors and investors is not always clear. The difference is very important, not the least because many confuse the 2017 and 2018 silver Krugerrands.
Generally speaking, coin collectors and those that invest in rare and numismatic coins (which may or may not contain silver or gold) are concerned with things like rarity, mintage numbers, certification, pretty presentation boxes, and so on. Pure investors in silver (and gold), on the other hand, are not concerned with such things. Rather, they are typically concerned with weight, purity, and price. The lower the premium above the spot price, VAT, and the manufacturing costs of a product, the better. That is, the most amount of silver and gold for the least amount of rands.
For example, a coin collector may pay R2,500.00 for a proof 2017 silver Krugerrand. One can argue that strictly speaking, such a purchase is still an investment in precious metals. But a bullion investor would not pay a 800% premium on an ounce of silver that sells for under R300.00 on the open market.
Whether you are an investor, or a collector, or both, it is therefore very important to understand into which category you fall.
Are silver Krugerrands low premium?
The 2018 silver Krugerrands are in fact low premium bullion coins. Compared to the 2017 silver Krugerrands, they are less than half price.
Perhaps the high premium categorisation by some is due to the VAT that is levies onto silver products in South Africa. In the US and Canada (where I see most investors checking prices), silver is VAT exempt. In South Africa, the only precious metal product that is VAT exempt is the gold bullion Krugerrand. Every other product, in any purity or form, whether silver, gold, or platinum, will carry VAT.
So, it is easy to find a US online precious metals dealer (pre)selling a 2018 silver Krugerrand for $18.50 (R245.00) and conclude that the slightly below R300.00 cost in South Africa is expensive or high premium. The difference is simply the VAT of 15%. And if you are dealing with a dealer that has a fair buy-back policy, you will receive the VAT when you sell the silver back to them. (See article on VAT and the silver price here).
What drives the price of the silver Krugerrand?
The 2017 Krugerrand prices are driven by market sentiment. The price reflects what collectors are willing to pay. Since its release, they have been decreasing in price. Sadly, several people bought silver Krugerrands last year for R750.00. I know of some that paid close to R1000.00 each. Now, these are available for R500.00 on some online platforms. What makes the situation more damaging is that some dealers are offering only the spot price (about R200.00) to those that wish to sell them.
The 2018 silver Krugerrands, however, are driven exclusively by the silver price and the rand/dollar exchange rate. Prices drop if the exchange rate weakens, and increase if the rand strengthens. Similarly, prices drop is the silver spot price decreases, and increase if the silver price increases. Moreover, the prices are set daily, so the rand price is market sensitive to the day. This means that there is no price discovery mechanism that is set or controlled by dealers or large sellers. The price is set daily by the markets, and it is very easy to pick out who is charging an unreasonably high premium on any given day.
What about the first year of issue?
As with most bullion coins across the world, the prices are mainly uniform. However, I have observed that first year issue bullion coins often end up selling for a slightly higher premium in future years. For example, the 1986 American Silver Eagle (first year of issue) is trading for well over 100% above the later years. The 1988 Canadian Silver Maple (first year of issue) trades at a 50% premium compared to the 2018 release. The same applies to bullion coins like the 2016 Australian Silver Kangaroo.
Will the 2018 silver bullion Krugerrand collect a similar premium in the years to come? If history is anything to by, then the answer is probably yes. However, if that is indeed the case, it should be viewed as a bonus, and not the chief rationale for purchasing them. After all, the 2018 silver Krugerrands is a low premium bullion coins with prices directly relational to the spot price and the exchange rate, not rarity.
The future of the silver Krugerrand
Given that the Krugerrand is a trusted bullion brand without equal, the silver Krugerrand has a very bright future. Trust in the precious metals market is very difficult to earn for any refinery or mint (private or government owned). It is developed after decades of consistency in terms of quality and market supply. For this reason, the Krugerrand brand is trusted and recognised the world over and I am certain that the silver version will change the investment bullion landscape, at least in the form of legal tender coins. I predict that within 12 months, the silver Krugerrands will surpass 10 million coins. In 2016, the Perth Mint released the silver Kangaroo 1 oz coin to compete in the legal tender bullion space against the American Eagle, the Canadian Maples, and the like. In the first year of issue, they produced and sold just over 11 million coins. With the reputation of the Krugerrand, I think that the silver Krugerrand will surpass this figure, notwithstanding the market factors that may be different from 2016.
The bullion silver Krugerrand is a historic release and it will become one of the most desirable and trusted silver legal tender bullion coins in circulation. Well done to the SA Mint and the Rand Refinery for finally making the decision to bring this product to the South African and international bullion market. 2018 will indeed be a memorable year!
Recently, Mike Maloney released a video in which he highlights his personal motivations for buying silver and gold. The video was born out of desire to provide a more personally contextual rationale for investing in silver and gold which goes beyond the usual run-of-the-mill answers one would find on various online blogs and articles.
While the content in the video is excellent and provides a more educated and nuanced set of reasons from both a personal and a global perspective, I couldn’t help sense that it was still somewhat disconnected from the South African context. That is, the socio-economic rationale and psychology of South African precious metal investor goes deeper.
Therefore, I would like to humbly take this opportunity to list my own reasons for investing in silver and gold, as a South African.
Rationale 1: Lack of Trust in the Government
As a South African, I believe that the current government is not trustworthy. Majority of the leaders in government simply do not have the best interest of their fellow South Africans at heart. This is true for all classes and races; citizens are merely a means to an end. Self-enrichment has become the highest career goal for many leaders and their parasitic associates.
Firstly, the confiscation of land without compensation has become the default phrase whenever certain politicians have nothing of substance to say in the way solid strategies to alleviate poverty and reduce inequality. The narrative that has been spewed forth seems to suggest that once land is redistributed, poverty and inequality will be methodically addressed. But this is simply not true; land and poverty are not necessarily mutually exclusive. While redistribution of wealth (whatever this may mean strategically) is certainly an obligation if South Africa is to avoid an inequality gap that may lead to civil war, I do not believe that confiscating land is the answer. Talk of confiscation of land without compensation makes me nervous because of the ethical/social implications. Can the government be trusted to draw a line in the sane and commit to confiscate only certain types of land (like productive farmland)? Or, once farms have been redistributed, it is a matter of time before certain residential and commercial properties will become far game too in the name of addressing inequality? Sadly, I am not confident in an answer either way.
Secondly, another slogan that South African political demagogues turn to is ‘nationalisation’. It seems that with the Socialist / Communist leanings of most government politicians, salvation of the country’s economy lies in the strategy of nationalising mines and banks. Yet reality points to something completely the opposite; a complete failure of this strategy (to date) to accomplish anything other than causing the unemployment numbers to rocket and enrich a few well connected individuals. I shudder to think that there is a possibility of handing a bank to some of the most corrupt individuals in the country! The treasury has basically been captured, so not much of an imagination is required to see a future South African in which politicians control the entire set of financial institutions in the country, without any accountability.
Thirdly, retirement funds (if they have not already been raided and looted) seem to be the biggest dangling carrot that may prove to be too irresistible to pass. Talk of another bailout of bankrupt state parastatal (think SAA, SABC, and so on) using pension funds is not merely a story dreamed up by mischievous journalists in the dark corridors of anti-government organisations. These are actual strategies openly discussed by the government. Even if not an outright repossession, I would not be surprised if pension fund beneficiaries are given a ‘haircut’ and justifying it as some sort of a wealth tax or restitution tax for past injustices.
Fourthly, state capture via the Gupta family makes the perfect case for the lack of interest that the government has towards the poor and starving. But sadly, the web of this evil extends much further than the Gupta owned companies and subsidiary contractors that made looting as such a large scale possible (think KPMG). This is merely the tip of the iceberg; it is merely what we know about. I suspect that the level of state capture, looting, and corruption goes deep enough to warrant calling it systemic. The problem with corruption that is systemic and complete is that it has gained sufficient critical mass and velocity to ensure that any effort to root it out or contain it next to impossible in a single generation. Hitting the breaks of an out of control truck surely begins to slow it down, but it may smash through many cars before it comes to a complete stop. Sadly, while this destructive truck of corruption through means of state capture comes to a stand-still, the carnage will continue for many years to come. This makes me distrustful of the rosy picture most government officials paint of the future about improving the general economy through job creation, controlled inflation, and addressing poverty and inequality. Fulfilling those promises while looting the state coffers is like putting tithes in the offering basket with one hand, but taking out with the other hand (plus a little extra).
Lastly, the fiscal management of the economy leaves much to be desired. The recent downgrades by Standard and Poor and other agencies was a major blow to the country’s economic future and security. More ominous is the prospect of South Africa losing its investment grade status on its local currency ratings. While politicians often downplay such likelihood and deflect the gravity of the consequences, the reality is that such a downgrade could lead to massive capital outflows. If South Africa is excluded from Citigroup World Government Bond Index (which requires a non-junk rating from Moody’s Investors Service and S&P Global Ratings), hundreds of billions may flow out of the country. The result? A very weak rand that without the possibility of recovery in the near term. With such a scenario almost a certainty, gold and silver provide a hedge against an unfavourable and weakening currency. Owning silver and gold will ensure that even if the international spot price remains unchanged, the rand value of the metal will continue to increase, as the rand weakens.
So, land can be confiscated, mines can be nationalised, retirement funds can be misappropriated, the value of our rand can be destroyed, and entire states be captured, but silver and gold have no counterparty risk associated with owning it. They represent real wealth in the hand. It is not an overstatement that it may be dangerous and irresponsible not to own physical silver and gold to safeguard one’s financial future in such a volatile and uncertain political and socio-economic context. In such an environment, silver and gold represent security against those who make a career goal to steal from the people.
Rationale 2: A desire to Leave an Inheritance
One of the reasons I studied and continue to work hard relates mainly to providing a future for my children. But beyond that, I wish to be successful enough financially to leave my children an inheritance. These twin prospects drive me more than any other reward hard work may provide. The question is, what form should a financial inheritance take should my wife and I pass away before our children are standing on their own two feet monetarily (perhaps even once they are adults)? Less morbidly phrased, what financial legacy do we wish to leave behind once we pass away peacefully in our sleep in our old age?
How about money in the bank? Or wealth in the form of various policies and trust funds? How about property that they can later sell at a profit? Perhaps even my business? While all of these are valid and prudent choices, I think most people ignore having a small portion of their wealth in the most honest form of wealth there is; physical silver and gold bullion. Banks can close and liquidate; the South African rand can become worthless; trust funds can be mismanaged (not to mention the exorbitant fees to manage them); and property can be reclaimed or occupied. But physical silver and gold are known specifically for their resilience to protect against such contingencies. They serve to anchor one’s wealth and to provide a measure of security against the above possible eventualities. And protection of wealth built over years of hard work and prudent living means having the pleasure and opportunity to pass down an inheritance to my children. A simple wish, yet important to me.
So, perhaps it is time to think beyond merely mainstream financial instruments when it comes to one’s wealth, especially in the light of our wealth potentially becoming and inheritance to our children and perhaps even our grandchildren.
Rationale 3: Push Towards a Cashless Society
Over the past few years, the concept of a cashless society has taken root in the minds of numerous governments around the world. An outright ban on cash will become a future reality, as governments set up a system by which every single financial transaction is trackable. For example, in November 2016, India banned 500 and 1,000 rupee notes without any notice. These notes represent as much as 85% of the cash transactions in the country. Yet, without notice, money become worthless overnight simply by government declaration. There are more examples. ‘Australia, Singapore, Venezuela, the U.S., and the European Central Bank have all eliminated (or have proposed to eliminate) high denomination notes. Other countries like France, Sweden and Greece have targeted adding restrictions on the size of cash transactions, reducing the amount of ATMs in the countryside, or limiting the amount of cash that can be held outside of the banking system. Finally, some countries have taken things a full step further – South Korea aims to eliminate paper currency in its entirety by 2020’ (www.businessinsider.com/the-global-war-on-cash-2017-1). The crusade against cash is clear for all to see.
In a cashless society, the government has the ability to simply cut citizens off from the economic foundation and prevent you from even purchasing bread should it decide to do so. Talk about the violation of life and food, if there is such a thing! The consequences on personal economics and social liberties are countless.
While South Africa is not at the forefront of the war on cash, it is a matter of time before we follow suite (either by choice or force). I suspect that silver and gold (real money, historically speaking), which represent the sole alternatives to digital currency, will become enormously important and valuable.
Rational 4: No Counterparty Risk
A ‘counterparty’ is a party with which a transaction is done. If A sells something to B, then B is a counter-party from A’s point of view and vice-versa. So, for example, even if you own your car outright, or have the title deed to your house, you are still liable to pay tax on those ‘assets’ or items. Although you own them, there is counter party risk (also known as ‘default risk’). That is, you are required to rely on someone else to fulfil a promise in order for your asset to maintain its value or to be usable. For example, if you own a car, but the government decides to no longer sell petrol, your car is worth virtually zero (apart from a very expensive and uncomfortable tent to be used for camping). However, purchasing physical silver bullion permits direct ownership of silver without counterparty risk, (e.g. the management qualities of the mining company). I am convinced that this characteristic makes silver and gold particularly attractive to forward thinking and judicious ‘investors’ who understand the long term consequences of poor government today. This is especially true of nationalisation of mines becomes a reality, and mismanagement and looting a certainty.
Rationale 5. Not Enough Silver Mined in SA
There simply is not enough silver available should silver hit the radar of the mainstream investor. For the South African investor, it is worthwhile to think of the present reality and data on silver mining in South Africa. According to www.gcis.gov.za, ‘South Africa does not have a primary silver mine and the metal is only produced as a by-product of other minerals. Silver was produced as a by-product from 13 gold operations, one uranium mine, two copper mines and two platinum mines in 2008. Despite the vagaries of the global economy, production increased by 8,1% to 2,7 million ounces of silver in 2008’. The most recent data that I was able to source puts the total silver mined in South Africa at 66 metric tonnes or 2.1 million ounces, worth about R550 million (at the spot price of R260). To put this into a global perspective, South Africa produces less silver in a year than the United States Mint required to produce American Silver Eagles in the month of April this year (the figure was 4 million ounces). More importantly, what this communicates to me as a silver investor is just how little local silver is actually available to the South African Investor.
For example, Forbes estimated our future president Cyril Ramaphosa’s wealth to be almost R7 billion. This means that Mr Ramaphosa could purchase South Africa’s yearly silver production 12 times over, or, purchase every ounce of silver mined over the next 12 years. While the Chinese clearly would never allow that to happen, this clearly demonstrates either how ludicrously rich the deputy president is, or, how little silver South Africa produces on a yearly basis. But on a more serious note, it seems to me that even if silver investing becomes more mainstream here in South Africa, the availability of locally mined silver for investment purposes will be relatively ‘petite’; less than 1/10 ounces of silver per adult per year.
Therefore, owning silver (especially) given how little South Africa produces seems to be a prudent investment strategy.
Rationale 6: Blockchain and Cryptocurrencies
Blockchain technology and crypto currencies are all the rage these days. The reality is, that investors have flocked to Bitcoin and other cryptos and alternative cryptos in the droves. Most have made large profits. In fact, I think there is still profits to be made in the near future, although no one really knows where the price hikes may end or crash. But given that these cryptos are highly volatile speculative digital ‘assets’, one should not be surprised at such large gains. This is especially true when it is obvious the prices are often driven by frenzied investors fearing of missing out (FOMO). Perhaps the greater fool theory is applicable here. In any case, so far so good.
However, as a dealer, I have observed that some investors have so much faith in Bitcoins (et. al.) that they sell their silver and gold and jump ship to cryptos. Often, they do so even if it means losing money (initially at least). Now, this is normal behaviour in the investment world, where one would discontinue or jump ship from non-performing investments to those that perform better or have better fundamentals for higher returns. But selling one’s precious metals (value you can hold and touch) for a digital asset (that exists only in the digital world), seems to be a poor decision. In my opinion, the poor decision is not to purchase cryptocurrencies and speculate, but the either-or philosophy that guides that decision. Physical precious metals AND cryptocurrencies must live side-by-side in harmony. Both should form of a healthy and balanced investment portfolio.
To avoid further preaching, my point here is simply this: I think the crypto bubble will pop, or deflate, or become overly regulated, and the masses (those with healthy profits) will eventually reconsider silver and gold. And when that takes place, given the previous point, silver and gold premiums will increase as production and supply will hit a short squeeze. A lot of crypto-profits will be chasing silver and gold. If that eventuality arises, I would prefer to be the holder of silver and gold, in the market to offload for profit, rather than trying to get my hand on a few ounces of silver or gold.
In addition, I suspect it is only a matter of time before cryptocurrencies are married to physical precious metals in some ingenious way. (This is already taking place, in fact) That is, the creation of a decentralised digital currency that is connected to physical precious metals guaranteeing its value beyond merely the electricity consumption costs it takes to mine it. Being in a position of owning precious metals in such a scenario would guarantee wealth security far more than for those who have only digital currencies chasing physical metals in order to have access to a gold and silver backed digital currency. I suppose following the heard may pay returns only for a short time. After that, it is the contrarian investor that laughs last.
The above six points are not meant to be taken as investment advice, or economic fortune telling. They are merely a few (perhaps long-winded) thoughts and opinions as to my own personal rationale for continuing to purchase precious metals, which ought to be included in any healthy investment portfolio. My hope was not to convince or persuade. Rather, I hoped to share with you my own thoughts and insecurities. Perhaps you have identified a few of your own thoughts and motivations through the ones that I have shared.
Investopedia describes investment bubbles to go through five stages:
- Displacement—innovative new idea or technology that has the potential to change the status quo.
- Boom—exponential price growth, much media coverage, and increasing individual investors piling in fearing missing out on a once-in-a-life time opportunity.
- Euphoria—the price continues into the stratosphere and caution is thrown in the wind and much of the logic to justify the skyrocketing valuation is the skyrocketing valuation (circular logic).
- Profit taking—smart money begins taking profits and often, such relatively small events become the needles that prick the bubble. Popped balloons do not re-inflate!
- Panic—the return down to earth becomes fiercer than the ride to the moon, with sellers overwhelm buyers, further deflating what air is left in the balloon.
It may be unfair to amalgamate Bitcoin and the other band of crypto-brothers with historical ‘investment’ frenzy like the tulip mania (17th century Europe, Dutch Republic), the South Sea Bubble (early 18th century England), or the ostrich feather bubble in the late 19th early 20th century. The reason for this, however, is not because of the current price of a particular cryptocurrency. After all, most detractors claimed that Bitcoin, for example, was in a price bubble when it hit almost $750. The same was said when it surpassed $1000, and again, the same caution was voiced all the way to $3000.
However, without a doubt, the cryptocurrency mania that is starting to gain mainstream recognisability certainly shares a number of similar traits and characteristics with other historical investment fads. In fact, I don’t think that an honest investor (who takes the time to study history) will be oblivious to the fad-status of some of the more popular crypto currencies available on the market today. For the sake of clarity, my light critique is not blockchain technology. I believe that the technology undergirding cryptos is brilliant and it is here to stay and it will change the world in more ways than anyone can imagine. Rather, my focus in this blog is on specific brands of cryptocurrency (be it Bitcoin, Litecoin, or Ripple), and whether they are in price bubble territory.
In all honesty, no one knows the life-cycle of the Bitcoin trend, or the Ripple fad, or, when a particular brand of crypto bubbles will pop. Is Etherium in bubble territory? Is Bitcoin? Will they last beyond the next few years, or are they merely the prelude for something else; something more technologically stable that solves the problem more efficiently? Again, no one really knows. Those invested in cryptocurrencies must draw their own conclusions and manage their own perceived risk relative to their investment. As Charles Hugh Smith put it, ‘There is no way to predict the course of specific cryptocurrencies, or the potential emergence of a new cryptocurrency that leaves all the existing versions in the dust, or governments’ future actions to endorse or criminalize cryptocurrencies.’
In the light of the above, readers may be forgiven for thinking that I am cautioning against cryptocurrencies in favour of physical precious metals. Since I am a precious dealer, it may be natural to assume that I may see Bitcoin as competition to silver and gold. But that is not entirely true. While I still believe in the idiom, ‘if you don’t hold it, you don’t own it’, and I am convinced that silver and gold are superior long-term assets to hold to anything on the planet, I think cryptocurrencies and precious metals are fighting in the same corner and attempting to achieve the same ends. In fact, logical scrutiny permits drawing the following conclusion: the most recent parabolic price movement of some of the more popular cryptocurrencies is a prelude to the future price movement of silver and gold, once the government sponsored price manipulation and suppression comes to an end. Once this takes place, there will be a massive number of people flooding into physical precious metals. Cryptocurrency owners will probably be doing the same as they attempt to lock in profits by exchanging cryptocurrencies for silver and gold. After all, silver and gold still remain on top of the food-chain in terms of safe haven assets given that they have no counter party risk. Bitcoin, and all other cryptocurrencies do indeed have numerous counter party risks associated with them!
I suppose what I am trying to caution against is not that purchasing cryptocurrencies for the purposes of speculation is unwise. Diversification is always wise and prudent. However, I would seriously caution discerning investors from sacrificing physical silver and gold on the altar of crypto currencies, especially since majority of those who invest in these digital currencies do not actually fully comprehend the intricacies of the technology itself. And to those who were lucky enough to enter the Bitcoin trade early and make large profits over the past couple of years, perhaps there is wisdom in taking the original capital invested, convert it to physical silver and gold, and then use those profits only to continue riding the wave. If indeed the bubble does pop (or a black-swan event occurs that does cause a catastrophic price contraction of the particular cryptocurrency held), not all is lost. Only the profits, which is palatable given that purchasing the cryptocurrency was a speculative trade in the first place.
We are pleased to announce that as of the 22nd of May 2017, Silver-sphere Trading Pty Ltd has been accepted by the Rand Refinery as an authorised and approved Krugerrand trader. Rand Refinery only distributes its Krugerrand range of coins through authorised and approved dealers. Other than banks and financial institutions, the list is made up of only a handful of South African coin dealers.
We are extremely grateful to the Rand Refinery for the opportunity and privilege.
In addition to striving to provide unparalleled service and pricing, we have put much effort and consideration into widening our range of products whenever possible. While silver still has a higher price potential than gold, many of our clients do own and continue to purchase Krugerrands and other gold bullion products as part of a balanced portfolio. The fact that we often had to send clients to other dealers to purchase Krugerrands has weighed heavily on our hearts for years. However, with our status as an authorised Krugerrand dealer, we are able to add Krugerrands to our product list. With this step, Silver-sphere is now in a position to become your one-stop bullion store.
Our first day of trading Krugerrands will be Monday, the 29th of May. Prices will go live at 9:00 am (daily). The second price will be set at 14:00 (daily).
We are excited to for this new chapter in the life of our humble company, and we trust that we can retain the privilege of serving you, our loyal client, with excellence and distinction.
EDITORIAL – ADV TS EMSILE SC
WHAT ABOUT CGT ON THE SALE OF SILVER COINS?
Indeed, what about capital gains tax (‘CGT’) on the sale of silver coins (which – one hears said these days – being undervalued, have even more upside potential than gold coins).
The first point to note is that the definition of ‘asset’ in paragraph 1 of the Eighth Schedule to the Income Tax Act, 58 of 1962, as amended, (‘the Eighth Schedule’ and ‘the Act’ respectively) includes:
‘(a) property of whatever nature, whether movable or immovable, corporeal or incorporeal, excluding any currency, but including any coin made mainly from gold or platinum; and
(b) a right or interest of whatever nature to or in such property.’
A silver bullion coin that is legal tender, ie a coin issued by a specific country or government that has a specific currency value on the face of the coin, is clearly not an asset. This is because it is currency, and because it is not made from gold or platinum. Examples include the American Silver Eagle, a legal tender coin with a face value of one US dollar, and the Canadian Silver Maple, a legal tender coin with a face value of five Canadian dollars. One hears that a Silver Krugerrand, also legal tender, is being minted in 2017.
On the other hand, ‘rounds’ or ‘medallions’, so-called because they are not released by a particular country or government, and do not have any legal tender value, are not ‘currency’ and therefore do constitute ‘assets’, being movable corporeal property.
Thus the sale of a silver ‘round’ or ‘medallion’ clearly does constitutes the ‘disposal’ of an ‘asset’ for ‘proceeds’, but the sale of a silver legal tender coin does not because it is currency and is not make from gold or platinum.
Paragraph 53(1) of the Eighth Schedule provides that:
‘A natural person or a special trust must disregard a capital gain or capital loss determined in respect of the disposal of a personal-use asset as contemplated in subparagraph (2).’
Paragraph 53(2) provides that:
‘A personal-use asset is an asset of a natural person or a special trust that is used mainly for purposes other than the carrying on of a trade.’ (Emphasis supplied)
Thus where an individual acquires and holds a silver ‘round’ or ‘medallion’ mainly for purposes other than the carrying on of a trade, it is a personal-use asset and, therefore, excluded from the ambit of CGT.
Significantly, paragraph 53(3)(a), which provides that personal-use assets do not include a coin made mainly from gold or platinum of which the market value is mainly attributable to the material from which it is minted or cast, does not apply to a silver ‘round’ or ‘medallion’.
It can safely be said, then, that the sale of silver coins that are legal tender is not subject to CGT, nor is the sale of silver ‘rounds’ or ‘medallions’ that are assets of a natural person or a special trust if they are used mainly for purposes other than the carrying on of a trade.
The term ‘trade’ is defined in section 1 of the Act to include:
‘every profession, trade, business, calling, occupation or venture, including the letting of any property and the use of and the grant of permission to use any patent as defined in the Patents Act or any design as defined in the Designs Act or any trade mark as defined n the Trade Marks Act or any copyright as defined in the Copyright Act or any other property which is of a similar nature’.
Silver coins that are legal tender are never subject to CGT when sold by whomsoever, and individuals and special trusts that acquire and holds silver rounds or medallions as collectors, or as a store of value, and not for trade, will not attract CGT when they sell such rounds or medallions as personal-use assets in terms of paragraph 53 of the Eighth Schedule.
*Disclaimer: The views expressed herein are those of the author, and do not necessarily represent the view of Silver-sphere Trading.
While we will continue to specialise in making available international silver bullion products to the South African silver investor, we have come to an important realisation concerning the place of international gold bullion in one’s precious metals portfolio.
We have always advocated that prudent precious metal investors should have both physical silver and gold in their portfolio. However, I believe that silver is a superior commodity to gold, for a number of reasons (perhaps this may be the topic of a future blog). And since the fundamentals for upward price drivers are more solid for silver than they are for gold, like Mike Maloney, I advocate a ratio of 80/20; that is, 80% silver and 20% gold. This ratio is based on the current gold/silver ratio, which is simply the number of silver ounces it takes to purchase a single ounce of gold. The current gold/silver ratio is around 70/1. (If this ratio drops to 40/1, I will adjust my personal holding to 50% gold, and 50% silver.)
In South Africa, the ideal way of investing in gold bullion is Krugerrands. While there are a number of pros for owning gold in the form of Krugerrands (recognisability, history, ease of acquisition, legal tender status, and so on), the immediate and chief advantage is undoubtedly the price. Simply stated, it is the cheapest available gold bullion product on the South African market. This is due mainly to low production costs by the Rand Refinery, and VAT free status. No other gold product, whether jewellery, numismatic/collectible coins, or gold bullion bars is VAT except. From this perspective, it seems it may be silly to purchase gold in any other form except a Krugerrand, right? Well, not necessarily!
While price considerations are undoubtedly very important, there are other factors that should influence your decision pertaining to what form of gold bullion you should purchase. Stated in the form of a question; what are the advantages of purchasing international bullion coins instead of Krugerrands? There are three that I think are important to be aware of.
The first relates the advantage of taking the gold out of the country in the case of a holiday or emigration. The current regulation, as per the South African Reserve Bank’s website, is as follows: Banks may allow the export of Krugerrand coins or the equivalent in fractional Krugerrand coins up to an amount of R30 000 as gifts by residents to non-residents (www.resbank.co.za). Further, South African residents may not export any Kruger Rand coins from South Africa without the prior approval of SARB (http://www.sars.gov.za). The success rate of the process, or what allowances are permitted seem to vary from case to case.
However, currently, there is no legislation preventing owners taking gold bullion coins issued by other countries (legal tender) out of South Africa. The only rule is that it would have to be below R1 million in value, or, part of the R1 million yearly allowance. As an emigrant, you are allowed to take up to ZAR4 million out of South Africa, or up to ZAR8 million per family unit. In addition to this allowance, you can also take personal goods to the value of as much as ZAR1 million. Travel between South Africa and your new home country is also allowed for, by the discretionary travel allowance, which amounts to ZAR1 million per adult per annum (www.moneytransfersouthafrica.org).
So, in the case of leaving the country, therefore, it seems more practical to own international gold bullion that is easily transferrable and do not require long administrative procedures.
Secondly, international gold bullion coins are the cheapest way to own gold that is easily ‘exportable’. Our international gold bullion coins are currently priced about 17.5% above the standard bullion gold Krugerrand. The cheapest gold coins that may be classified as a collectible/numismatic coin that is not considered to part of the R30,000.00 export restriction, is the proof Krugerrand (minted by the South African Mint). The current price of a 1 oz proof Krugerrand is just over R31,000.00, which is just under 70% above the price of a standard gold bullion Krugerrand. While it is true that I could have chosen another older gold coin that may be cheaper on the secondary market, I chose a new proof Krugerrand in order to compare apples with apples. It seems that it is more financially prudent to diversify into international gold bullion coins, than numismatic/collectible or proof South African coins. This is the case at least from the perspective of paying the lowest premium per oz of gold that is not under the current export restriction.
Thirdly, VAT should not be seen as a deterrent, since both gold Krugerrands and international bullion coins have a market related price within the South African bullion investment market. It is this market related price that is important, not the pricing composition. A Krugerrand is bought VAT free, but when it is sold, VAT is not recovered. Inversely, if an international gold bullion coin is bought with VAT, it is then recovered when it is sold. (For a more detailed explanation of this point, see a previous blog here: https://www.silver-sphere.co.za/vat-not-seen-problem/).
In conclusion, I wanted to state categorically that I am not advocating abandoning purchasing Krugerrands. Rather, it is my personal opinion that it makes a great deal of practical sense to diversify into international gold bullion coins, especially if emigrating or taking gold out of the country is within your future realm of possibilities.
While I risking writing an article that may come across as self-promoting, I have none-the-less decided to pen some thoughts on why I think that serious silver investors should purchase their silver from reputable and registered dealers, rather than purchasing them privately from the various platforms available online. Often, saving a few Rands is simply not worth taking a chance given the high quality counterfeits coming out of (mostly) China.
In short, the major rationale behind my recommendation comes down to three issues in terms of guarantees, namely, product authenticity, product quality, and buy-back / trade policy.
Firstly, registered precious metals dealers guarantee the authenticity of their silver bullion products, since they import directly from authorised distributors for the various international mints (e.g. the Royal Canadian Mint, The United States Mint, and so on). This means that typically, there is always a paper trail that can trace any particular silver product back to the authorised distributors, and the authorised distributor can trace back the particular product to the mint that manufactured it. This authenticity guarantee should certainly be worth the couple of Rands one ‘may’ save purchasing privately from platforms such as Junk Mail and Gum Tree. I would explicitly advise that investors stay away from e-bay, since it seems it has become the primary platform where counterfeit silver bullion products are filtered onto the world markets.
Secondly, registered and trusted dealers guarantee the quality of all of their products. That is, you will notice, for example that all of our products will carry the description of BU at the end of each bullion product. BU stands for ‘brilliant uncirculated’, which is a way of saying that the coin, round, or bar is in the same condition as it was when it left the particular manufacturing mint or refinery. Another way of saying it is that the bullion product has never been circulated and retains all of its original mint luster. While this may not be important to some investors, to others this is very important. A dealer will (or rather, should) always disclose if a bullion product is second-hand / pre-owned by inserting the letter C for ‘circulated’. Moreover, dealers typically do not buy back damaged bullion without a major drop in the offer price. When purchasing from private individual, purchasers usually do not know whether the silver in new, or whether the seller has used them as chips on poker evenings with friends. The better the quality of the silver, the easier it is to re-sell in the future. Therefore, it makes sense to purchase silver that is brilliant uncirculated, rather than taking a chance purchasing them from private individuals.
Finally, trusted dealers that have been in the market for years, always have some form of a buy-back policy. In other words, they are prepared to buy back the silver that you have originally bought from them. This is a positive, for anyone selling either sub-quality silver, or unrecognised brands, or even counterfeit silver products would most certainly not have a buy-back policy. So, a buy-back policy is always a sign of a dealer who puts his silver where his/her mouth is. Purchasing silver from a registered and reputable dealer then comes with some form of commitment that you will never be stuck with your silver without having an avenue to sell when the time comes. It is best to check and understand the content of your dealers’ trade policy.
Final thought. I am certainly do not advocate abandoning the secondary private market. I am glad to see that silver is becoming more frequently traded, and more and more are seeing the value of owning silver as part of a typical investment portfolio. However, there are dangers worth mentioning, and this brief outline is meant to make a case for purchasing silver from trusted sources. If you do find a deal that is offered by a private individual that you may know and trust, or one that is offered by a legitimate verified seller on an online platform, then why not request that the origin of the silver is disclosed, perhaps even proved via a purchase invoice. Once it’s origin has been established, and the seller has indeed purchased it from a reputable and trusted dealer, then, as they say, ‘Bob’s your uncle.’ You have scored a good deal, and your mind can be put at ease concerning quality, purity, and authenticity.
At Silver-sphere Trading, we guarantee our products on all fronts, and we remain committed to stocking only silver that is sourced from renowned, trusted, and respected international mints and refineries.
Krugerrands are VAT free. Silver bullion is not. Does this make silver an inferior purchase in South Africa?
Mark Twain once wrote that the only difference between the tax man and a taxidermist is that the taxidermist leaves the skin. While the statement is meant to be humorous, the statement rings true for silver investors especially. Permit me to explain. While gold investors who purchase Krugerrands can enjoy purchasing Krugerrand VAT free, Mr Nene Mr van Rooyen Mr Gordan is not as kind to silver investors, as silver carries a standard 14% VAT. Adding insult to injury, there is talk in the corridors of government about a possible increase in the VAT rate from 14% to 16%.
So, vis-à-vis Krugerrand investors, where do the silver investors stand having to pay the additional 14% VAT? Does this mean that investing in silver is more expensive, and that the profits are therefore less by at least 14% when the bullion is off-loaded for profit?
In my opinion, the answer is a resounding no. The best way to understand my deduction is to view both precious metal purchase categories (i.e. silver and gold) from the perspective of its re-sell value. While purchasing a 1 oz Krugerrand does not include VAT of 14%, re-selling that same Krugerrand will likewise exclude the 14% VAT. This is true whether the Krugerrand is sold privately or to a local dealer. For example, (I have chosen a round number), a dealer will sell a 1 oz Krugerrand for R20,000.00. When that same coin is sold back to the dealer (provided that the spot price and exchange rates are the same), the buy price will be around R18,900.00 (no VAT paid or included). So, VAT is not charged when the Krugerrand is purchased, or paid by the purchaser when that particular Krugerrand is sold.
The inverse is true for silver. While purchasing a 1 oz silver bullion coin (or bar/round) does carry a 14% VAT charge, the selling price of that same bullion coin will likewise include the 14% VAT. This is true when it is sold privately for a market related price. While I cannot comment on the buy-back policy of other dealers, this is certainly true when or if that silver bullion is sold back to us at Silver-sphere. For example, let’s assume that the price of a 1 oz Canadian Silver Maple is R300.00 (incl. VAT, which is R36.84). When that same coin is sold back to us (provided that the spot price and exchange rates are the same), the buy price will be around R275.00 (incl. VAT, which is R33.77). So, VAT is paid when a Canadian Silver Maple is purchased, and it is paid [back] by the buyer when it is sold.
Essentially, then, the inclusion of VAT on silver bullion products should not be viewed as a problem, since both gold Krugerrands and silver bullion have a market related price within the South African bullion investment market. It is this market related price that is important, not the pricing composition.
One of the most frequently raised points of concern for new silver investors is the question, where do I sell my silver. I have answer this question in an earlier blog here: https://www.silver-sphere.co.za/can-sell-silver-time-off-load/. However, there is a different implied dimension to this question that is often probed, namely, should I sell all my silver when the price spikes significantly higher?
While such a subjective question is difficult to answer (given that each silver investor has a specific strategy in mind, not to mention having bought silver at various pricing entry points), I would like to take the next few paragraphs to provide my own personal strategy as to why I will not sell all of my silver, irrespective of how much the price spikes. Here’s why.
I think of my total personal precious metals position in three thirds. Each of these three thirds addresses a certain need and contains a different selling/holding rationale.
The 1st third is for speculating. Should the silver spot price spike violently towards the previous high of $50 per ounce in a relatively short time, I would only off-load one third of my total silver position. After all, the idea from the outset was to purchase silver when the price of an ounce of silver is undervalued, and sell it when it is overvalued. While it is difficult to define what ‘undervalued’ or ‘overvalued’ means in terms of the Rand value of an ounce of silver, the idea is to make a profit. If there is money to be made, then why not offload one’s entire silver position if the price climbs so dramatically? This is where the other two thirds come into play.
The 2nd and 3rd thirds of my silver investment position serves very different purposes.
The 2nd third is intended to provide a certain type of an ‘outside of the banking and monetary system’ insurance policy against the stupidity and irresponsible actions of governments and central banks on fiscal policies. Ever increasing debt, money printing, surreptitious taxing, pension fund mismanagement, possible hyperinflation or economic depression, currency devaluation, and corruption are just a few of the actions/scenarios that owners of physical silver can hedge against (at least to some degree). Silver represents wealth that you can hold and touch, that is outside of the government-controlled banking and economic system. This type of honest wealth in the form of a commodity with 3000 years of monitory history and utility will certainly provide peace of mind. (Truthfully, the peace of mind is directly relative to the percentage one contributes to precious metals relative to one’s entire investment portfolio.) Thus, no matter how high the price spikes, it seems imprudent to offload such an important hedge and insurance policy for the sake of a few pieces of colorful paper.
The final third of my silver investment portfolio serves another important purpose, namely, preserving the purchasing power of my hard-earned money (correction; currency). Should I put R400.00 and an ounce of silver under my mattress today, five years later, the value of my silver (representing the other R400.00 only in the form of silver) will be preserved, while the R400.00 in the form of currency notes will be worth considerable less (due to inflation mainly).
Here is another example that makes the point well. I bought my first two-bedroom town-house in July 2004 for R245,000.00 (a bargain, but more or less market related). In terms of the silver price, my town-house cost me about 7000 ounces of silver (Rand/Dollar exchange rate in July 2004 was R6.20 and the silver price was approximately $5.60/oz). Now, fast-forward to the present (2016). My town-house was evaluated conservatively at R750,000.00. From a fiat currency perspective, that is a growth of about 200%. I should be smiling. However, in terms of silver ounces, the shocking realisation is that R750,000.00 (the current value of my town-house) is worth just under 3000 ounces of silver—calculated at the current Rand/Dollar exchange rate and the current silver spot price. In other words, although I have tripled my ‘money’ (from R245,000.00 to R750,000.00), it terms of the silver value of my property, I lost over two thirds of its value. My point is this: had I bought silver instead of buying property or putting my money under a mattress, I would have preserved the purchasing power of my hard-earned money.
So, returning to the original question; why would I not sell all of my silver even if the price popped significantly higher? The answer is, because only a third of my physical silver is used to speculate and trade for profit. The other two thirds serve two greater purposes. That is, as an insurance policy against the recklessness of those in charge of making global financial decisions, and secondly, it preserves the purchasing power of my money/labour.
We would like to take this opportunity to announce a fresh chapter in the life of Silver-sphere Trading. In an attempt to establish further our brand, service, and credibility within the South African physical silver bullion market, we have decided to set up an office in a safe and secure premise in Johannesburg. As of the 1st of September, we are locating to the Acacia House Building in Stonemill Office Park, Darrenwood, Johannesburg.
Stonemill Office Park is situated in a lovely and tranquil setting next to the Darrenwood Dam (opposite Cresta Shopping Center), and it will provide adequate security and safety to all our clients who prefer to collect their purchases. Not to mention the quality coffee and cappuccinos that will be available should you simply wish to visit us and chat. Should you decide to visit or collect, please remember to let us know a day in advance. Going forward, our services and product range will remain the same, and we continue our commitment to provide the lowest silver bullion prices in the industry.
Bridgette and I would like to say a sincere thank you for all your business, trust, and support throughout the years. Without your trust in us, Silver-sphere would not exist. We are truly grateful for the opportunity that you have afforded us to serve you, and we hope to continue to do so in the future.
If you like statistics and numbers, then the previous chapter would certainly flick your switch, as it provided invaluable data on the silver supply dynamics (i.e. where silver comes from and how much of it is available). This chapter, chapter 4, presents the other side of the coin, namely, silver demand (i.e. how much silver is required to make the ‘world go around smoothly’).
Morgan and Marchese explain that it is important to understand that silver demand has three main categories; fabrication (which includes photography, silverware, and jewellery) industrial (which includes electronics, batteries, photovoltaic, and other novel uses), and monetary (which includes coinage, silver bars, and Exchange-Traded Products). Thus, the first major segment in this fourth chapter is a summary of the two major global silver demand studies (CPM Group and Silver Institute’s work with Thomson Reuters GFMS), which are to be considered from the above three dimensional demand context. In short, one study concludes that silver is in a surplus (total supply 1.05 billion oz; total demand 968.5 million oz per year), while the other that silver is in a deficit (total supply 978 million oz; total demand 1.08 billion oz). The authors own research seems to suggest that silver is in deficit, somewhere between the two studies. (The next few pages seems to jump from discussing the nature of silver to some thoughts on the Consumer Price Index with little explanation of the flow of thought).
The next segment presents the some thoughts on the True Money Supply (TMS), but again, very little explanation is given as to what the purpose of this topic is in relation to the broader argument of the chapter. Perhaps to a professional analyst, the connection is clear?! But be this as it may, under this same sub-headings, the authors commence discussing industrial/investment demand relative to the silver price. I think the charts are technical, but given some effort to understand them, they are very interesting and telling.
The next sub-section focuses on novel and growing uses of silver within the realm of industrial demand. Here is the list: photovoltaic, Ethylene-oxide, solid state lighting, flexible displays, interposers, batteries, super-capacitors, wood preservatives, automotive, radio frequency identification, water purification, medical uses, and food packaging. This information was necessarily attention-grabbing, for it assists investors and stackers of the physical metal grasp the actual value and importance of silver to our fast-advancing modern civilization. It’s more than just a shiny metal to be hoarded and hidden in the back of vaults.
The final segment of the chapter discusses the future of investment demand. In short, silver industrial and investment demand has steadily increased over the past few years, and it is projected to increase significantly over the next few years. While it is true that the price of silver has declined since 2011 in tandem with increased investor and industrial demand, this is perhaps a temporary state of affairs that is due to the current manipulation of the price by the cartel. No manipulation will last forever.
In summary, and most importantly, the authors make the following statement: ‘the reason silver will see such a drastic increase in price over the next several years is due to sharp increase in investment demand.’
For the South African investor, it is worthwhile to think of the present reality and data on silver mining in South Africa. According to www.gcis.gov.za, ‘South Africa does not have a primary silver mine and the metal is only produced as a by-product of other minerals. Silver was produced as a by-product from 13 gold operations, one uranium mine, two copper mines and two platinum mines in 2008. Despite the vagaries of the global economy, production increased by 8,1% to 2,7 million ounces of silver in 2008’. The most recent data that I was able to source puts the total silver mined in South Africa at 66 metric tonnes or 2.1 million ounces, worth about R550 million (at the spot price of R260). To put this into a global perspective, South Africa produces less silver in a year than the United States Mint required to produce American Silver Eagles in the month of April this year (the figure was 4 million ounces). More importantly, what this communicates to me as a silver investor is just how little local silver is actually available to the South African Investor. For example, Forbes estimated our Deputy President Cyril Ramaphosa’s wealth to be almost R7 billion. This means that Mr Ramaphosa could purchase South Africa’s yearly silver production 12 times over, or, purchase every ounce of silver mined over the next 12 years. While the Chinese clearly would never allow that to happen, this clearly demonstrates either how ludicrously rich the deputy president is, or, how little silver South Africa produces on a yearly basis. But on a more serious note, it seems to me that even if silver investing becomes more mainstream here in South Africa, the availability of locally mined silver for investment purposes will be relatively ‘petite’; less than 1/10 ounces of silver per adult per year.
The Silver Manifesto – Thoughts for the South African Investor Part 3
Chapter 3 is a closer look at the silver supply dynamics and provides readers with some very interesting facts, figures, and much needed context. After all, having a basic understanding of where the silver will come from in the near term future is a very important question.
The first section broaches the topics of the changing composition of silver production by type of mine, and provides an overview of the nature and supply dynamics between primary silver producing mines (mines that mine silver only) and mines in which silver production is merely a by-product of mining other metals (like gold, zinc, copper, and so on). The authors predict that silver production from primary silver mines relative to total silver production is set to increase substantially for the rest of this decade. Whether this has any bearing on price remains to be seen.
The next two sections of the chapter deepens the context and deliberates potential new mines that will affect the supply dynamics, as well as naming the largest silver producing mines in the world. Even if figures is ‘not your thing’, the sheer scale and numbers of ounces mined/produced by these giants is quite something. It certainly provides a global overview of the major mines that make up the total yearly world silver production.
By far, the most pertinent and interesting section is the discussion on the cost of mining an ounce of silver. According to the research and calculations of the authors, the industry as a whole (both primary and non-primary silver producers) has all-in cost well in excess of $25 per oz (where a mine fits in on this continuum is of course contingent of operational efficiency, ore grade, and so on).
The next two sections provides technical information and charts on the concept of ‘peak silver’ production, and key regions for silver production growth, while the final section highlights some essential contextual information when discoursing on the gold-to-silver ratio. More accurately, what should it be, given that the current ratio is almost 73-to-1 (it was 83-to-1 less than four weeks ago)? On this all-important ratio, the authors argue convincingly that this ratio should not be seen as necessarily static, but it usually depends on the level, status, and condition of the world economy. Thus, during an inflationary environment, silver typically outperforms gold, and a ratio of 16/1 is not unrealistic (especially since this was already achieved in the previous bull market). In fact, Morgan and Marchese go on to predict that over a 30 year time horizon, it is possible that even a 5-to-1 ration could occur (even if briefly).
A brief note is warranted. The next chapter discusses silver demand dynamics, so much of the information in this chapter will be contextualised within the broader theme of supply and demand dynamics.
So, in addition to the wealth of important and valuable material provided in this chapter, what key issues are worthy of noting for the South African silver investor?
Biggest issue for the local investor is the question of cost. The industry average all-in cost is $25 per oz (in 2013). Even if costs have been cut substantially across the industry due to the depressed commodity prices over the past three years or so, I believe that still today, an ounce of silver is available to the general South African public for less than it cost to mine it. Those who added to their physical position when silver spot price was around $14 – $15 per oz, will more than likely reflect on those purchases in the near future as the purchase of a lifetime. But more to the point at-hand; purchasing an ounce of silver below the cost of production is a no-brainer, in my opinion. This is especially true when viewed from the perspective of peak oil (increasing energy costs in the not-too-distant future) and long-term prospect of our local currency.
Another key comment made by the authors relates to the Mexican mines, ‘The Mexican royalty tax will make the mining industry less viable, at least in Mexico, which is important for the supply of silver because Mexico is the largest silver producing country.’ While we are not even in the top 30 silver producing nations, over taxation of silver is clearly a blueprint for some governments with socialist tendencies. Given the socialist direction and disposition of the current government, as well as the nationalisation of mines and banks rhetoric, perhaps the current pricing structure of silver in the South African context is the lowest it will be, relative to the spot price.
The Silver Manifesto – Thoughts for the South African Investor Part 2 (chapter 1 synopsis and thought can be found here) commences with the following extracts from the US Constitution, which merits quotation in full:
‘Section 10: No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of debts…’ Although the relevance and value of the above constitutional statement is still debated, the authors seems to hint that the existence of paper US dollars underpinned by nothing but thin air is indeed a violation of the Federal Constitution by the US Federal and State Governments. President Zuma is clearly not the first person or organisation to violate its own constitution. Who knew!?
The authors then go on to provide a brief history of silver and gold in the United States, and an excellent synopsis of the relationship between silver and gold, the various fiat money epochs and legislations, and the creation and development of the first central bank in 1791. While the actual history is fascinating, what has stood out for me is the validation of a statement made in chapter one. That is, it is in fact bank interventions (i.e. fractional reserve banking, artificial interest rate manipulation), are the cause of the cyclical boom / bust cycles in our modern economy. With the exception of a few luminaries (like Andrew Jackson, who abolished the central bank during his presidency), the havoc created by the uncontrollable consequences of fractional reserve banking is clearly imprinted on the history of the United States. It seems that the US has learned very little from the various disastrous monetary experiments in her own brief history, as her economic leaders have taken the monetary fiat experiment to a whole new global level.
A few points stood out for me as a South African Silver investor.
Firstly, it seems that within the broader history of the United States, silver was often preferred to gold because of its utility in commerce. Or, as stated by the authors, ‘silver lasted longer as a medium of exchange (real money) for the people, surviving until 1965.’ Gold circulation amongst the population ended with the 1933 Executive Order 6102 (a United States presidential executive order signed by President Franklin D. Roosevelt ‘forbidding the Hoarding of gold coin, gold bullion, and gold certificates within the continental United States’ (Wikipedia). Silver lasted until 1965. In South Africa, the new coinage that commenced from 1965 meant that silver was removed from circulation and replaced by cupronickel. I think that this is an important piece of information for those who are purchasing silver today. If the past is anything to go by, silver is used by the people, whereas gold will be preferred by governments (to settle debt in bilateral trade). Thus, the utility of silver during times of crisis may be superior to that of gold. After all, there is no modern historical precedent for silver confiscation, but there is for gold. Thus, while no one knows the future and how it may pan out, holding silver may be ‘safer’, more useful, and less regulated and controlled.
My second point is loosely related to my previous point above, but important and relevant none-the-less. In short, it seems that for the South African investor, there is plenty of gold available for purchase, but the situation is not appear to be the same with silver. While I could order a few hundred Krugerrands from authorised dealers in South Africa, the Rand Refinery seems to have no silver to sell to South African dealers. I made a call a few days ago requesting an application form to purchase silver bullion products from them directly as a dealer (some clients wanted to add 1 oz Rand Refinery bars to their collection), and I was told that currently, they do not have any silver to sell due to the long pipeline of silver owed to various parties. I am willing to accept that this was just another way of saying that they are not interested in new business. However, I think the person was being genuine, especially given the following piece of information that appears on their website: ‘Rand Refinery does not carry large stock of silver, and our obligation is to fulfill international orders as a first priority.’ (www.randrefinery.com/faqs_gold_sales.htm) Perhaps silver shortages in South Africa are not as unrealistic as many believe. It seems that the preference of adding significantly more silver than gold (in terms of value) to one’s physical bullion portfolio may prove to be the wise and prudent decision in the future.
The silver bullion market is more established and matured in the United States than it is in South Africa. One of the ways in which this state of affairs is apparent is availability of relevant contextual information on silver. For example, I can number dozens US and Canadian economists who’ve specialised in precious metals analysis and have made their research accessible to the lay investor. However, I cannot name more than a handful of South African economist who have taken the time to make relevant information accessible to the South African silver investor within or own context.
In light of this, I hope that the series of blogs to follow will make a small contribution to making relevant information available by providing a few of my own thoughts on one of the most important books published on silver in recent history, namely, The Silver Manifesto, by David Morgan and Christopher J Marchese. Of special interest to me is the co-author, David Morgan, who is one of the most respected precious metals analysts today. Since he has dedicated his entire life to the study of money, economics, and precious metals, no silver bullion investor can afford to ignore the wealth of data that he and Marchese make available through their publication.
Each fortnight I will summarise a chapter in the book, and provide some personal reflections on the content not only as a silver investor and dealer, but also, as a keen amateur student of monetary history.
Chapter 1: A Monetary History of Silver—3,400 B.C.–1792
While the first chapter aims to provide a brief monetary history spanning over 5000 years (an impossibility for a tiny chapter in a relatively short book if you ask me), the value of this first chapter is in the foundational concepts extracted from monetary history. That is, the authors consider a number of introductory concepts that will help the reader better grasp the more ‘advanced’ content of the chapters that follow. For example, what is the origin and nature of money, why is it necessary, who chooses what constitutes money, and what makes a chosen monetary system sound or unsound? While these questions are answered superficially (often in different sections) throughout the first section of the chapter, from the outset, authors are emphatic in defining money primarily as silver and gold, not paper or fiat currencies issued and controlled by central banks and governments. The paper ‘money’ in one’s wallet is not money per se; they are fiat currency notes with intrinsic value of a few cents. Moreover, the authors take issue with the modern monetary fiat system and central banking in general, explaining that it is in fact bank interventions (i.e. fractional reserve banking, artificial interest rate manipulation), are the cause of the cyclical boom / bust cycles in our modern economy. The necessity of a truly free market money, absent of government interference, is crucial for a sound and fair monetary system.
The concept of deflation is likewise addressed, taking issue with the unhealthy fear that market pundits and ‘expert’ economists on popular government censored channels have of deflation. Deflation, ironically, is common place in free market economies and is synonymous with the concept of liberty. In truth, it seems that governments are afraid of deflation because of their significant debt burden, which is easier to pay back in an inflationary environment. The higher the inflation, the cheaper the debt repayment is in real terms.
The rest of the chapter is dedicated to demonstrating that silver was utilised as money throughout most of recorded history; from as early as 5000 BC, through the Lydian system, the Medieval period (including the various Chinese dynasties and broader Asia), the Renaissance, and even the discovery of the Americas. I found this segment to be a fascinating read, especially as the authors successfully expose how each attempt at creating a paper money system (a derivative of real money) has ended in economic bankruptcy and disaster. The value or purchasing power of each paper currency throughout history eventually returned to almost zero (there is usually some value left in the paper itself, and the cost of the printing).
For the South African silver investor, there are three take away points in chapter 1. The first is the question of the silver price in the near future. While the authors predict that the silver price should be in triple digits within the next five years, they make an almost throw away comment that is infinitely more important to the South African silver investor than the current price. That is, investors should rather focus on the value of each ounce of silver, than the currency value (like the US dollar, or the South African rand). In other words, view each ounce of silver in terms that highlights its value relative to other commodities. A case in point the silver price in terms of the Zimbabwean dollar before and during the time of hyperinflation. The currency value of an ounce of silver was irrelevant, and could only be discovered in terms of other commodities. I am certain that during the peak of the Zimbabwean hyperinflation (peaking at an inflation rate of 98% per day or a monthly rate of 79.6 billion percent), no thinking person would accept Zimbabwean currency notes for even an ounce of silver. In this respect, silver, in Zimbabwean dollar terms, hit a rate that may as well be quantified as infinity to 1. Essentially, the point is this; learn to value your silver ounces in terms of other commodities and not in Rand terms or even Dollar terms. This will provide a more accurate measure of your wealth.
The second issue that stood out as relevant is, that sound money should be free of central bank manipulation and interference. Personally, since our own reserve bank is not going anywhere any time soon, it is up to each individual to create a system of wealth and saving that bypasses as much as possible these interventions and manipulations. This means becoming your own central banker for even a small portion of one’s portfolio (i.e. 5% – 10%) by owning precious metals (especially silver) and preserving your wealth.
Thirdly, it is a helpful starting point to understand that when discussing the silver spot price (in Dollars or Rands), it is never the price of silver that increase or decreases. Rather, it is the currency that is devaluing or increasing (though government manipulation and currency wars between nations) relative to silver and/or other commodities.
This book is available for digital download on Amazon.com
One of the most frequently raised concerns by silver investors (including many of my clients) relates to storage. Where do I store or hide my physical silver not only to keep it safe from thieves and robbers (should they gain access to my property), but to ensure access in case of an economic crisis or emergency? In my personal opinion, three options stand out as effective.
The first option is to purchase a high category safe (CAT 2 and above). The higher the category, the heavier and more difficult it is to access the content. For example, a CAT 3 safe can weigh between 400-1000 kilograms, with 70 mm body thickness and three locks. Such a safe is designed for use in jewellery stores, banks, diamond dealers and various high risk institutions where the protection of valuables is a priority. Therefore, this is an ideal way to protect your silver from petty criminal. The cost is prohibitive, as it can cost upwards of R15,000.00 (subject to size requirements). As far as I understand, even professional locksmiths with tools could take a significant amount of time to break open these high category safes. (As a reference point, a typical low cost gun safe can be pried open in less than a minute with a crow bar, so those should not be an option). However, there is a down side; while owning a high category safe is beneficial, there are too many stories circulating in which house robbers force owners to open these safes at gun point. In my opinion, this remains a high risk option, especially if information of the existence of the safe is passed on or sold to career criminals.
The second option is to hide the silver somewhere on your property. Some examples include burying it inconspicuously in a specific part of the garden (in a water tight container of course). A good memory is key here, as is doing it without being seen by your neighbours, and perhaps even your young children who will jump at the opportunity to tell their friends á secret about buried treasure’. Some have suggested burying the silver about 4 feet deep, covering it with one foot of earth, then placing some circulation coins above the silver, then adding another foot of ground, and then finally placing a crushed soda or beer can before adding the last remaining two feet of earth. This way, even if by some remote chance metal detectors are used by thieves, they would be alerted to a crushed can and most likely move on. Should these sophisticated thieves be tenacious enough and continue searching/digging, they would find a few coins and move on. This may sound over amusing and comical, but it is not an uncommon technique for hiding silver.
Other techniques include hiding bullion at the bottom of XXL patio plant pots. Personally, I have not heard a robbers stealing the 300 kg patio pot with a lemon tree neatly planted in it. In fact, I’ve even heard of silver being stashed in a one of the old geysers we all have in the roof of our homes. Again, house robbers don’t typically remove old geysers.
So, should you choose this option (since you have no access to a private vault as per my next point), imagination is your only limit.
The last option is perhaps the ideal option, namely, storing silver at your local private vault company. Unfortunately, as far as I know, this option is limited to Johannesburg, Durban, and Cape Town, cities in which private vaults operate. These are extremely high security premises that specialise in the storage of cash, important documents, and valuable items like bullion. One option is International Bank Vault (IBV) in Nelson Mandela Square and Durban (http://internationalvaults.com). They have world class security features that are of international standards in order to ensure peace of mind. Due to location and unlimited access to my box, I personally prefer to use the services of Knox Titanium Company (www.knoxvault.co.za) in Killarney. As per their website, Knox is based at the former US consulate building, has state of the art systems, and the best of breed technical and IT security, which in combination make Knox the safest Safe Deposit Box facility in the country. For under R300 per month for a small safety deposit box, Knox is the ideal precious metals storage solution for silver investors. And by the way, you are not obligated to declare the content of your box, which should give you additional peace of mind.
Should you have reservations about handing over your silver to a third party for storage, there is additional insurance available on the content of your box with numerous insurance companies for a minimal fees. Thus, should an asteroid hit the building (which is the only possible way to get forced access to the content of the boxes without your consent), you are fully covered. .
A final thought. Perhaps the ideal way forward for any prudent investor is to diversify risk and allocate a certain ratio of one’s physical silver position to each of the above strategies. It would certainly mitigate risk, and provide you with the assurance that you have access to portions of your wealth at any given time.
Disclaimer: I am not in the business of precious metals storage and neither do I qualify to provide professional advice on storing precious metals. Therefore, the above is merely my personal recommendation and preference. Should you have any further questions or advice relating to the above blog, please do not hesitate to make contact with me.
Where can I sell my silver when it’s time to off-load?
This question is perhaps the most important question that a silver investor should ask. After all, one only becomes a successful silver bullion investor once the silver is re-sold for a profit. So, what options are there for South African silver investors?
Essentially, there are a number of options available when the time arrives to offloading ones silver bullion, assuming that the silver being sold is not some no-name-brand product cast from silverware and recycled jewellery in a back-yard, but recognised and trusted forms of bullion (i.e. American Silver Eagles, Canadian Silver Maples, and so on).
So, the first option is to skip the middle-man and sell it privately on platforms like Bid or Buy. This online platform would undoubtedly be the safest and most ideal way to offload both small and large silver positions. The only drawback is that it may take a few weeks and perhaps even a few months to do so, depending on the number of coins, rounds, or bars being sold. I do not think that this is a serious challenge, since many other types of investments may take a few days to a few months to liquidate. Think of property as an example. On the Bid or Buy platform, one has the option to sell via an auction, or simply list the silver at a set price. Since profiles of both buyers and sellers are pre-approved and require an ID and various security checks, it is a very safe option.
The second possibility is to sell the silver to private refiners. The only downside is that these companies usual tend to pay close to (sometimes even below) the spot price of silver, which is usually as much as 30% below the market related price of a typical ounce of silver. Choosing this avenue to offload silver would mean liquidating ones silver position in a matter of a few days. But sadly, it would also mean less money.
The third option is to purchase silver from a reputable dealer who is willing to buy back the silver that was originally sold to you, or, at the very least, make you a market related offer. At Silver-Sphere Trading, although there are some ‘terms and conditions’, we would typically buy back only the silver that was bought from us formerly (proof of purchase required). The price difference between buying and selling (provided that the exchange rate and silver spot price remain unchanged) is between 7% and 12% lower than the bulk pricing on our website on that specific product. After all, it makes more sense to purchase back the silver from my clients when they are ready to re-sell, rather than importing the same product and take on all the risks associated with importing high value cargo (not to mention the delay of up to three weeks). For more information, please take a look at our ‘trading buy-back policy’ page.
So, my opinion as a silver bullion importer and dealer is this: offloading silver is not difficult given that the market participation in South Africa is increasing exponentially yearly. The only decision is, how much you are willing to accept for the silver. Sell it privately over a few weeks or months for a market related price on a trading platform like Bid or Buy, or sell it speedily to private refiners for the spot price? In my personal opinion, the best of both words would be to re-sell back to the dealers from which it was purchased. It is the most hassle-free way of trading silver bullion.
I decisively dislike sensationalism and exaggeration. For this reason, I am naturally skeptical when I hear experts say that silver is probably the most undervalued asset class on earth. Is there truth in this claim, or is this merely an exaggeration?
After much reading and research, it seems to me that the statement is not an embellishment at all. For example, the silver price is way below the inflation-adjusted price in terms of the price peak reached over thirty years ago. In January 1980, the silver price reached an all-time high of just under $50.oo per ounce. This price inflation adjusted over thirty years would mean a silver price of over $125.00 per ounce today.
But there is a catch: the $125 figure is calculated by using present-day US government CPI formula. John Williams of Shadow Government Statisticsrecently applied the CPI formula from January 1980 (when CPI formulas were somewhat more credible) to the $48.70 silver price in 2011 for a more accurate and credible inflation-adjusted representation. According to him, silver would need to hit $568 per ounce to match its 1980 equivalent (http://www.gold-eagle.com/article/time-admit-gold-peaked-2011).
Admittedly, the 1980 peak silver price was a bubble type blow-off top. Such a pronounced price adjustment is unlikely to occur in the short term without some sort of a globally significant geopolitical or economic black swan event. However, a price revisit merely to the previous $50.00 peak of April 2011 would mean a 140% price increase from the current price level of just under $20.00 per ounce. To put this into context of the South African Rand, a return to the previous high around $48.00 would mean that an American Silver Eagle, which is currently selling for R315.oo per oz, would cost you over R700 (without considering the Rand/Dollar exchange variable a few years ahead). According to many experts, that is no pipe dream; it is merely a question of when.
One ounce of silver can be bought for less than it costs to mine it. To say that silver is undervalued is therefore an understatement. Theodore Butler fromSilverseek.com expressed this same sentiment, writing that ‘silver is the cheapest investment asset to own and that it is likely destined, therefore, to be the best investment opportunity over time.’ In his article, he backs up his conclusions with research notes and some excellent charts showing silver’s relative value to other benchmarks like gold, platinum, copper, crude oil, Dow Jones Industrial Average, the US Dollar Index, and the 10 year US Treasury note (http://www.silverseek.com/commentary/worlds-most-undervalued-asset-13135). It is worth taking the time to read this piece.
In a nutshell, the price of silver does indeed seem exceeding undervalued and is set to resume its upward price run after a painful year of consolidation. Silver is merely catching its breath at base camp and will soon be on its way up Mount Everest. And those who made the climb in 2011 say, the view from the top is incredible
The great thing about social media is that it has given us that many more ways to interact with our customers. We appreciate the feedback and comments that we receive and will listen to our customers’ needs.
A question that often pops up on our Facebook Page is this: “why is the bullion coin price so much higher than the spot price of silver?” I think this is a great question, and will do my best to answer it in the next few paragraphs.
The spot price of silver is what commercial buyers are willing to pay for very large purchases of silver usually in raw form (e.g. silver granules). Risking oversimplification, the spot price of silver is the US Dollar price that mines sell to the refineries and essayers at, who then use it to manufacture the various silver bullion coins, rounds, and bars. This manufacturing process carries additional costs over and above the spot price of silver granules. For example, refining the silver granules (from 99%) to 99.99%, manufacturing of the rounds on which the specific coin design is pressed, quality control, and so on. Moreover, the manufactured silver bullion product, like the American Silver Eagle (minted by the US Mint) is distributed through very large bullion banks and retailers. Again, there is an additional premium as the middle man gets paid a cut.
So, in terms of costs, by the time the coin lands in your hand, the formula is this: Spot price + an average premium of $4.50. If the spot price is $20.00, the coin would cost R24.50.
However, the bad news is that this is the price that those living in the US pay for a silver Eagle. Investors wishing to purchase an American Silver Eagle in South Africa have the additional burden of paying a VAT of 14% (i.e. 14% on the purchase price, not the silver spot price) since silver is not seen by the South African government as a monitory metal (like gold, on which South Africans do not pay VAT). Moreover, since the coins that we sell at Silver-Sphere Trading are minted in various countries (e.g. Mexico, Austria, and Australia), the additional premium is accounted for by import costs (i.e. packaging, shipping, insurance, import agent fees, and the South African Reserve Bank clearance fees).
So, thus far, the cost formula for a silver Eagle looks like this:
Cost Price of 1 Silver Eagle = spot price + 14% VAT + shipping + insurance + other fees
Since we are importers of large quantities of silver, the $4.50 premium levied on the silver Eagle is essentially the only place where we are able to cut costs and pass it along to our clients. All of the other costs are fixed. Ultimately, however, the cost of international silver in South Africa is market related, for anyone wishing to purchase an American Silver Eagle locally would pay a market related cost as outlined above. The same applies to silver minted by local minting companies. Although there my be less associated costs (shipping, insurance, and so on), the premiums on a local ounce of silver is higher due to the low mintages of various generic rounds minted locally. To put this into perspective, the US Mint has minted and sold over 40 million silver Eagles in 2013. That is an astounding figure.
In conclusion, looking at the silver price is merely the beginning of the formula. At the end of the day, we, at Silver-Sphere Trading strive to provide our clients with the best possible prices and service. We take pride in the fact that we have a one-on-one relationship with many of our regular clients.
As Toba Beta once wrote, “Value is more expensive than price.” So stack physical silver with confidence, for its value is far higher than that of the colourful piece of paper for which you swop it.
The Investopedia defines diversification as a risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.
Diversification is a model that also applies to physical silver bullion investors, so it is valuable to take a few minutes to consider how this would apply.
There are countless silver products available to the silver investor which, in my opinion, makes diversification a fun exercise. There are four categories within a physical silver portfolio worth considering.
Rounds / Coins / Bars
Have a mixture of legal tender coins, rounds, and bars to diversify in terms of silver bullion forms.
Legal tender coins are coins that have been issued by a specific country that have a currency value, like the American Silver Eagle or Canadian Silver Maple. These coins are guaranteed in terms of purity and quality by their particular country of issue.
Rounds are essentially silver medallions minted by various private mints that have no legal tender status. Examples include the American Buffalo or the Sunshine Mint rounds. These medallions are usually excellent value for money, for they are priced towards the bottom end of the silver bullion market.
Finally, diversify by purchasing bars from reputable refiners, like Johnson Matthey or the Sunshine Mint. These bars (and the rounds or medallions) are generally the cheapest way to own silver in South Africa.
So, having a mixture of the above is something that certainly makes stacking and investing in silver more visually pleasing and enjoyable as you admire the detailed artwork of each bullion type.
Non-numismatic / Semi-numismatic
Serious investors, especially those who purchase high volumes on a consistent basis, often purchase the lowest prices bullion product. This is indeed wise, for the strategy is to purchase the most amount of silver for the least amount of Rands. However, diversify by purchasing a little silver that may be considered semi-numismatic, like the Australian Silver Kookaburra, Chinese Silver Panda, and the Somalian Silver Elephant.
These coins change design yearly and will undoubtedly add an additional dimension to potential future profits. For example, I recently purchased a 2008 Australian Silver Koala for over R1200.00. I paid that because I wanted to own all of the release years since 2007, and that was the fair market related price for the 2008 release. Another example of growth is the 2010 Chinese Silver Panda currently selling for around $80.00 (the release price was just over $20.00 4 years ago)
Several mints release special bullion coins series over a two or three year period. For example, the Royal Canadian Mint released two bullion coins per year from 2011 to 2013 in a series called the ‘Canadian Wildlife series’. Although these silver bullion coins were priced very close to the Canadian generic Maple silver bullion, the complete six coins in the series currently sells for double the price of six silver Maples (if you are lucky to own the complete set).
The latest releases (1st in the sereis) that I would recommend is the Peragrine Falcon from the Birds of Prey Series by the Royal Canadian Mint (total of 4 coins to be released over 2 years), the Year of the Horse from the Lunar Series by the Royal British Mint, and the ½ oz coin from the Royal Australian Mint called the ‘Great White Shark’, part of the Wildlife Series. If previous releases are anything to go by, diversifying by purchasing these first in the series coins will almost certainly yield excellent returns.
The final diversification technique relates to the weight of the silver bullion variety. Although the majority of investors stick to one ounce coins or bars, it is worth considering both fractional silver bullion (e.g. half, quarter, or tenth troy ounce silver rounds, and even 1 gram bars) and larger bars or coins (e.g. five or ten ounce denominations, and perhaps even 1 kilogram bars and coins).
Although fractional silver almost always carries a higher premium per full ounce, it is extremely practical to own if the time ever comes to use silver for bartering or trade.
Larger bars and coins, on the other hand, have a lower cost per troy ounce, making them the one of the ‘cheapest’ forms of silver bullion purchase.
So, over the coming months. This will ensure exposure to a broader market when the time comes to offload a portion of one’s stack.
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If scratches on your bullion coins do not bother you, you are in the minority. For most, a small little surface abrasion can be rather off-putting. Niki Taylor once wrote, ‘I always hated my mole growing up. I even thought about having it removed. At the time I didn’t do it because I thought it would hurt, and now I’m glad I didn’t.’ I often consider small abrasions and scratches that appear on silver bullion coins and bars to be like a large unattractive mole. However, unlike Niki Taylor, silver bullion stackers don’t usually relinquish their dislike of these perceived ‘imperfections’.
If you are a collector of numismatic or even semi-numismatic silver bullion coins, surface scuffs and scrapes will almost certainly affect the value of the coins. But what about silver bullion coins like the American Silver Eagle, or the Canadian Silver Maple? Do minor surface abrasions on these coins (and bars) affect their value?
The tentative answer is no, it ‘should’ not. Most silver bullion coins that we sell do not have numismatic value over and above its silver value, and are not sold for their beauty and rarity per se; they are sold for its silver content. Therefore, even if the coin or the bar may have minor surface abrasions, you are still purchasing one troy ounce of pure silver. Generally, all bullion coins will have some slight abrasions on them, since they are simply stacked on top of one another in tubes of 20 or 25. It is my view that it is unreasonable to expect perfect condition coins in a classic bullion tube of even Brilliant uncirculated condition coins.
For those who fall somewhere between the two extremes, we stock semi-numismatic silver bullion coins which are sold in capsules. Coins like the Australian Kookaburra and Koala, and the Chinese Panda, are just three coins which are typically in just about perfect condition. These coins usually carry an additional minor premium over its non-capsulated cousins (e.g. the Eagle, Maple, Libertad, Philharmonic, and so on) not because they are perfect and come in capsules, but rather, because the design on the face of these coins changes yearly. It is this aspect that makes such coins attractive to investors who wish to go beyond merely stacking tubes of Maples and Eagles, to collecting each release. Over the years, these coins do accumulate additional value.
So, do minor imperfections on typical bullion coins something devalue the coins? If you are an investor, the answer is no because the bullion coin was presumably purchased for its silver content, not for its perfection. Deep scratches and dings however would affect resale value negligibly. For example, I would sell silver bullion coins with major imperfections for about R10.00–R15.00 below the price of average condition coins.
If you are a collector of perfect condition bullion coins, then purchase graded coins that have been certified to be in perfect condition (i.e. graded MS70—perfect in every way with no distractions on the surface of the coin). These would typically carry very hefty premiums, and thus, go beyond the controls of purchasing the most amount of silver for the least amount of Rands. Bullion coins that have been graded and certified to be in perfect condition by a reputable grading company (e.g. Professional Coin Grading Service [PCGS]) can carry a premium of over 100% of the value of the coin’s silver content. Such graded coins are usually collected by numismatic collectors rather than silver bullion investors.
At Silver-Sphere Trading, all of our coins are sold in Brilliant Uncirculated (BU) condition, meaning that they have not been pre-owned or circulated, and retains all of their original mint luster. Visit our website to view our range of bars and coins.
The most crucial question a silver investor can ask is this: how do I know the silver which I have purchased is genuine and not fake?
Although some of the modern fake coins (and bars) are excellent forgeries, there are some simple ways of testing whether a coin or bar is genuine silver.
The first is the ‘ping test’. Gently place the middle of the coin on the inside of your index finger (it is preferable to wear cotton gloves when handling silver coins to avoid greasing the coin with skin oils for this will probable cause unsightly marks) and strike it ‘softly’ with another silver coin. If you hear a ping, the coin is genuine silver. I realise that this test may seem unsophisticated, but real silver has a ping, while other metals that often make up fake silver (copper, lead, or bronze) will not have this sound property.
The second test is to simply measure the exact dimensions of the coin with a calliper. Each coin has a specific diameter, thickness, and of course, must weigh 31.103 grams. For example, an American Silver Eagle should measure 40.6 mm in diameter, 2.98 mm in thickness, and weigh 31.1 grams. If any of these measurements are out by more than 1%, the coin is probably not genuine. So, for example, an American Silver Eagle that is 40.6 x 2.98 in terms of measurements, but weighs 29.01 grams is more than likely not genuine. The same applies if the coin weighs 31.1 grams, but the diameter is out by a millimetre.
In the case of the Johnson Matthey 1 oz silver bars, the dimensions are 50.4/29.7/2.7 millimetres, and, should weigh 31.1 grams (plus the plastic sleeve may add a little extra). Since silver has a specific atomic density, only real silver will have the exact combination of measurements. Fake bars or coins will probably have the same dimensions, but the weight will be way off (by way off, I mean 3 grams).
The third option is more complicated and somewhat destructive and potentially damaging to the coin, so I would not recommend it. It is called the specific gravity test. The coin is first weighed (measurement 1), then weighed again in water (measurement 2), and the ratio then calculated. In practical terms, this test would require that water in a bowl is placed on a scale (one that measures at least to two decimal places) and set on zero. A one troy ounce coin is then hung on a piece of thin cotton and lowered into the water (preferably set up using a tripod over the bowl of water already on the scale). Once the coin is static and not touching any of the sides or the bottom of the water, the weight of the coin (measurement 1) should be divided by the weight of the coin in the water (measurement 2). The result should be 10.49, which is the specific gravity of genuine silver. For example, 31.103 grams (1 oz. of silver) divided by the measurement of the silver in water (e.g. 2.987), should provide a measurement of 10.49 for genuine silver (a small margin of error is permissible due to the weight of the cotton and some impurities in the water).
When it comes to peace of mind, my sincere recommendation is to simply stick with registered and reputable dealers. At Silver-Sphere Trading, I personally guarantee that my bars and coins are genuine silver, and possess certificates of origin for each shipment. I also do not purchase silver from private individuals which I later re-sell, precisely to avoid inadvertently purchasing a very good quality fake bar or coin which may have me fooled.
If you have any questions about this post or what Silver-Sphere Trading has to offer you, please feel free to contact me on firstname.lastname@example.org.
Visit our website www.silver-sphere.co.za to view our full product range and request a quote.
The four major South African banks will pay you around 5% interest per year on a typical 32-day fixed deposit. So, a deposit of R100.00 will grow to a whopping R128.00 after five years. It is an interesting exercise to put this into the context of the silver-versus-Rand debate.
The spot price of 1 troy ounce of silver in January 2005 in South Africa was about R44.00 (incl. VAT). In 2011, when silver peaked, it was about R365.00 (incl. VAT). But let’s ignore the peak, since even seasoned investors miss such price explosion peaks. Today (09 May 2014), after a year-long price consolidation in 2013, the same troy ounce of silver costs around R225.00 (incl. VAT). That is almost 500% growth over a nine year period.
Rewind to 2005, take that R44.00 spent on ounce of silver and put it into a saving account. Fast-forward to today. How much has that R44.00 earned in interest? Even applying a generous 8% interest rate per year over nine years, the balance would have increased to just under R90.00 (excluding the numerous fees). Tongue in cheek, Kints said it best: ‘A dollar here, a dollar there. Over time, it adds up to two dollars.’
A disclaimer may be in order. I am by no means advocating not having a savings account that represents some liquidity in the case of emergencies. I am simply saying that saving currency (i.e. colourful pieces of paper declared to have value) is a poor facilitator of inflation protection. Ultimately, the intrinsic value a R100.00 note is worth the cost of the ink and the paper it is printed on.
So, permit me to return to interest rates paid by banks on your savings and compare the 5% interest you receive with the inflation figures of selected products between January 2012 and January 2013 (National Agricultural Marketing Council-Food price monitor report):
- Grain Products: Spaghetti 8.63%; Loaf of White Bread (700 g) +10.03%; King Korn (1 kg) +10.93%; Cake Flour (2.5 kg) +15.28%; Medium Fat Spread (1kg tub) +24.97%
- Meat and Dairy Products: Eggs 1.5 dozen +13.44%; Whole Chicken (Fresh per kg) +12.01%; Milk Full Cream (2 Lt) +14.20%; Milk Low Fat (2 Lt) +15.62% Tinned Tuna (170 g) +23.94%.
- Fresh and Processed Fruits and Vegetables (per kilogram): Onions +15.76%; Pumpkin +24.57%; Cabbage +28.16%; Tomatoes +30.49%; Oranges +36.30%; Lettuce +73.27%.
Notwithstanding that the above are the products which have experienced the highest rate of inflation, and that the official CPI was 5.4 % (between January 2012 and January 2013), the point is non-the-less painfully obvious: it is better to buy Spaghetti and sell it one year later than to put money into a savings account.
Though becoming a spaghetti trader is seemingly sound advice, is there a better option that requires less storage space? More seriously, what can an average working man do to preserve the value of his hard-earned currency?
Personally, I think that one way to ensure preservation of wealth against inflation is to purchase something that cannot be inflated into oblivion, it cannot be printed, and is priced well below its intrinsic value, namely, physical silver bullion. The economic fundamentals for physical silver point to much higher prices in the medium to long term and if history is anything to go by, silver investors and stackers are in for an exciting ride. As Eric Sprott said, ‘this is the decade for silver.’
Steve St. Angelo has pointed out that peak oil is relevant for the future prices of silver. Oil production is falling, while costs and consumption are increasing. Mining one ounce of silver requires a certain amount energy (i.e. oil). However, the cost of extracting and refining one unit of energy in the form of oil to retrieve that ounce of silver from the ground is likewise snowballing. In the long-term, a higher silver price is a mathematical certainty. Remarkably, it was higher oil prices that pushed silver to peak in price in 1980 and 2011.
Perhaps the least understood characteristic of silver is that silver is economic energy. It takes economic energy to mine an ounce of silver. This economic energy is then enclosed or captured. Owning one ounce of physical silver means possessing one unit of economic energy; energy that cannot be destroyed or deflated.
According to SRSrocco, the top twelve primary miners produced 92.7 million ounces of silver in 2013, and sold 92 million at an average realized price of $23.09. Using his formula, break-even for the group was $24.05 per ounce. This means that the group gave away their silver at a net adjusted loss of $0.97 per ounce. Such losses are simply not sustainable in the long term. Owning physical silver at these below cost prices is undoubtedly a wise decision indeed. Even if prices are manipulated towards the down side by JP Morgan and friends, such tactics have a life-span; it cannot last for ever.
South Africa is more susceptible to a Communist Socialist agenda than most realise. With the current undercurrent rhetoric of nationalisation of banks, mines, and farms, as well as land redistribution without compensation, the future socio-economic landscape is rather uncertain. In such an environment, silver represents real wealth, whereas fiat paper represents not only liability and debt, but vulnerability to wealth confiscation .Land can be confiscated, mines can be nationalised, retirement funds can be misappropriated, but silver has no counterparty risk. It is not an overstatement that it may be dangerous and irresponsible not to own physical silver to safeguard one’s financial future in such a volatile and uncertain political and socio-economic context.
In short, buy silver because it is below the cost of production, because oil price will only go up, and because you live in South Africa. If you already in the physical silver game, you should pat yourself on the back for taking the initiative to preserve and conserve the value of your labour. Remember, the fundamentals are on your side, even if the government turns out not to be. Just be patient and keep stacking.
Don’t forget to visit www.silver-sphere.co.za today to view our full range of silver bullion products.