Hi all -- I received a very interesting email from Provident Metals today (they're a major American dealer). It has significant implications, and instead of trying to summarize it I'm just going to share the whole thing: ----------- The bullion marketplace has two sides – and sometimes they can act very differently from each other. What do we mean by that? There are two ways to trade precious metals: physical product and paper metal. The former category is what Provident does: buying and selling bullion in the form of coins, bars, ingots, rounds, etc. When we enter into a transaction, actual metal is bought, sold, and physically transferred. In the paper market, however, bullion is traded in the form of futures contracts, ETFs, derivatives, and other promises. In theory, both the physical and paper markets involve buying and selling metal. However, there’s one major difference. In the paper world, it’s easy to lose sight of how much physical metal actually exists. Traders can (and often do) buy or sell more metal than is readily available in the physical marketplace. Exchanges like the CME publish how much metal exists in approved warehouses versus the number of open futures contracts. More often than not, traders have agreed to buy or sell MUCH more metal than is available in the physical market Why are we mentioning this today? In recent months, the supply of newly-minted physical silver has steadily declined. In fact, it appears that demand is far outpacing the amount of coins and bars available. Granted there are numerous factors in play, but there’s one major reason for this supply shock. Two of North America’s largest precious metals refiners have shuttered – and no one has filled the void. Over the past two years, Dallas-based Elemetal and Miami-based Republic Metals have both ceased operations. Private mints like Elemetal and Republic played a vital role in the bullion marketplace. While there are numerous world mints that can belt out coins, only a select few facilities are available to make low-premium bars and rounds. It’s no surprise that just a handful of companies are available to serve this role. The silver bullion market is intensely competitive with exceptionally tight margins; it requires a tremendous amount of capital, patience, and infrastructure. Consider what goes into making just one silver round. A private mint must buy raw metal, refine it to 99.9% purity, form it into thin sheets, stamp out blanks, mint the blanks, package the rounds into tubes, and then ship them to distributors. This process requires maintaining a large staff and buying extremely expensive machinery. Furthermore, it’s a cash-intensive process; all of this metal must be carried and financed while it’s being fabricated into product. All of this effort is worthwhile when the market is upbeat and healthy. During periods of strong demand, private mints enjoy an excellent flow of orders. Even though the margins are thin, they benefit from strong volume and non-stop activity. However, when conditions are quiet, mints are stuck with massive overheads and fixed costs. It’s truly a “feast or famine” existence for private mints – and this might be why so few exist in the United States. While it’s unclear exactly what led to the downfall of Republic Metals, they were one of the few refineries willing to produce low-premium silver rounds and bars. Following their departure, it’s become increasing difficult to source this product. Low-premium silver has become extremely scarce in the marketplace. While Provident is able to offer a wide variety of live rounds and bars, many refineries are quoting a 2-6 week delay for new orders! A Look Ahead There are two potential outcomes to this scenario. The first is that premiums will rise as inventories dwindle. The harder it become to find live silver, the more buyers will pay for it. Secondly, refining capacity may catch up with demand. The existing field of private mints will expand production, run more shifts, and find a way to satisfy the growing need. While it’s possible that new firms would enter the market, the massive capital and infrastructure requirement will be a barrier to entry. It seems unlikely that more private mints will open any time soon. What does all this mean for you as a silver buyer? Chances are that low-premium silver will be increasingly scarce in coming months. Refineries have been caught off-guard and did not anticipate this surge of demand. Between renewed interest in precious metals – and two major firms existing the market – a shortfall of product has developed. Mints will do their best to catch up and increase the output of supply, but in the interim, it’s more likely that premiums will head higher. The bullion market is more active now than six months ago, but it remains a far cry from what it was a few years ago. During periods of intense demand, silver bars and rounds have traded for close to $2/oz over spot. Now, today, many top-quality products can be had for less than a $1 premium. If you’re looking to add cost-effective silver to your holdings, now may represent an excellent time to lock in. Between upwardly trending spot prices and rising premiums, we see multiple reasons why silver could be more expensive soon.
Maybe a contributing factor in why those two firms went bust was the fact that the premiums were too low given all the costs he mentions combined with low sales over past few years of the bear market (talking to a few dealers and manufacturers, the last couple of years have been the worst in a long time)? It pushed them into sourcing more risky blood gold & silver. Hence no one keen to step into the low premium market.
Sounds plausible. I've thought about getting into the business, but it would have to be from a different angle, with lower cost processes.
This business is all about volume/economies of scale. The main area of complexity is blanking, not minting, a lot of machines required there so scale essential. There are various business models: Do it all in-house, minimise inefficiencies between processes Just do product design and minting, buying blanks using supplier's standard sizes Focus on design and licensing, outsource the production
I'd lean toward Option 1. But I'd probably only do it if I could disrupt the industry with new, better refining processes or technologies. I'm also intrigued by what I've read about "silver streaming" and companies like Silver Wheaton Corporation. They seem to get silver at a fourth of spot price or something. I don't fully understand why they're able to get it so cheap from mining companies.
I don't know about Australia, but there is no shortage of generic bullion in the US. I asked two of my local dealers that buy from large wholesalers every week, and both said there is plenty available at some of the smallest premiums they've seen in years. Silver Wheaton (now called Wheaton Precious Metals) pays $$$ to mining companies and gets to buy silver and gold really cheap as payback (see links). https://www.fool.com/investing/2017/06/26/how-wheaton-precious-metals-makes-most-of-its-mone.aspx https://www.forbes.com/sites/greats...-the-ultimate-streaming-service/#2ae8ef213cba
You are going to need a fair few tens of millions to do option 1. I have read criticisms that miners give away too much upside to get financing from streamers and royalty companies.
Bron, I just posted a link to the Little Coin Shop & Bullion Now on Silver Doctors dot, the usual, asking for a comment on the opening of the new shop. CHEERS. https://www.silverdoctors.com/gold/...st-countries-are-beginning-to-stockpile-gold/
