Investing: Seeking Out Silver Physical Bullion

Long term, silver is a good part of virtually any portfolio. Silver bullion is the best and easiest way to start participating. Here are several ways to get involved in investing in silver.

American Eagle Silver Bullion Coins

The U.S. Mint started minting these beautiful coins in 1986. With nearly 135 million coins sold since then, the American Eagle Silver Bullion Coins have become the world’s bestselling silver coins. The design of these 1-ounce coins (0.999 silver content) was inspired by Adolph A. Weinman, the designer of the 1916 Walking Liberty half-dollar.

A primary advantage of the Silver Eagle is that it’s very liquid, so buying and selling are easy and convenient. A primary disadvantage is that the premium can run as high as $2 over the metal content value (depending on the dealer).

One-ounce rounds

These bullion coins weigh 1 ounce and are 0.999 pure silver. They’re like the silver eagle in the previous section, but they have lower premiums. Private mints create them, and the premium is typically 40¢ to 50¢ above the metal content value. Silver rounds aren’t as well-known as silver eagles, but they make good choices for investors who want to get more silver bang for the buck.

Junk silver bags

This may sound like an odd way to invest in silver, but it’s actually a great consideration. A junk silver bag has $1,000 of face-value silver coins issued in 1964 or earlier. The reason it has that less-than-appealing name is because the coins in the bag are in poor condition and you won’t find any coin that’s rare or has numismatic value. The coins are generally worn down from usage and wouldn’t be considered at any numismatic grade above good.

The $1,000 bag weighs about 55 pounds and contains about 715 ounces of pure silver. What kinds of coins are in the bag? If half-dollars were used, there would be 2,000 coins. If the coins were quarters, then there would be 4,000 coins. Dimes? 10,000 coins. Because the bag of coins is bought as a bullion investment, the price of the bag would move in correlation with the price of silver. Many firms can sell you half bags that have $500 of face-value silver coins to make it easier for storage and handling.

Even though these old coins are generally priced as bullion, they are coins that are no longer minted. That tells you that the supply is finite, so prices for these bags could rise further if demand increases.

The difference between the buy and sell is fairly constant, and there are investors who buy bags when premiums are cheap or negative and trade them when premiums increase substantially. Keep in mind that you’re required by law to report your sale of $1,000 face value 90 percent bags on IRS Form 1099B. Smaller quantities of 90 percent aren’t reportable. (Ninety percent silver means that all the coins are 90 percent silver content and are typically U.S. dimes, quarters, and/or halves issued 1946–1964.)

The $1,000 bag of silver dollars

This interesting play in silver isn’t exactly a bullion investment, but it’s not a rare coin investment either. Circulated silver dollars struck between 1878 and 1935 carry higher premiums, yet they’re a prime source of legal tender silver coins because they’re so recognizable. These early dollars are divided into two price categories: the more expensive Morgan dollars struck between 1878 and 1904 and the Peace dollars struck between 1921 and 1935.

The Peace dollar being the less expensive is quoted by the bag. Such coins are always in average condition and grade VG (Very Good). A Morgan dollar bag and better-quality coins are available at slightly higher prices, so it pays to ask questions before placing an order. This option is popular because silver dollar bags have represented real, portable wealth for more than 100 years.

The 40 percent silver bag

The last silver coin the United States made for general circulation was the 40 percent silver clad 50@@cs struck from 1965 through 1969. This is another popular way to own silver bullion in legal tender form. Like circulated 90 percent coins, these $1,000 face value bags are traded primarily for content. Because they’re 40 percent pure, a bag contains substantially less silver (296 troy ounces), which is reflected in a lower selling price.

The 40 percent silver bag has a number of advantages:

• These are real U.S. coins and therefore are legal tender. In an emergency, this could be significant.
• The bag has a high face value ($1,000), which limits the money anyone could lose should silver move lower. This is easily seen in a down market because premiums almost always move higher.
• Unlike 90 percent silver bags, you’re not required to fill out IRS Form 1099B on 40 percent bags when you sell.

Silver bars and ingots

In terms of getting the most silver metal content against the purchase price (in other words, paying the least amount of premium over metal content), bullion bars are the way to go. Ingots are really just small bars that are imprinted with designs to make the bar attractive and/or collectible. Ingots are more appropriate for collectors rather than for investors. In the following list, I concentrate on bars (uh, bullion bars, not adult drinking places):

• 1,000-ounce silver bars: These bars tip the scales at about 68 pounds. They’re typically used to settle the delivery obligations of futures contracts at NYMEX (the New York Mercantile Exchange, which is part of the CME Group). A typical futures contract is tied to 5,000 ounces of silver, so five of these bars will cover the physical requirements for delivery. The bottom line is that this size isn’t practical for average-sized or small transactions typically done by investors. Besides, why get sued by the delivery guy for his backache?
• 100-ounce silver bars: Another popular way to own bullion silver is the 100 troy ounce bar, which is 0.999 fine. At a tenth of the size, it’s also a tenth of the weight: 6.8 pounds. This is the most typical weight for large retail transactions among investors.
• 10-ounce silver bars: These are popular and the most common for small investors. They come with a slightly higher relative cost, but as an absolute transaction, they fit the small investor’s budget.

There are other bar sizes (such as odd-weight retail bars), but these are the best sizes due to their acceptability in the marketplace and the high degree of liquidity (being able to convert to cash).

The common popular brands that most investors will come across are Engelhard and Johnson Matthey. There are more obscure sources, but these two have a long-time reputation for their standards such as metallic quality and authenticity.

So, what kind of silver is best?

Some of this is tied to your preference. Those who are purists like the bars and 1-ounce rounds. Those who want a more popular, more liquid, and easier bullion transaction would opt for the U.S. Eagle coins. Your budget will also dictate the transaction. Some buy a large lump sum now. Still others will allocate a portion of their monthly budget and do some dollar-cost averaging.

Serious investors may consider a portion into bullion as a part of their precious metals foundation and then allocate a portion of their investable funds among some of the paper assets (such as mining stocks and ETFs). Over the long haul, accumulating your investing among the different classes of physical and paper assets will prove rewarding as the precious metals bull market unfolds.