Friday, May 23, 2008

U.S. rations silver!

I'm trying a sensationalistic yellow journalism headline for this post. Maybe I can get it into the New York World or New York Journal. So put aside the dire headline and delve into what's happening with U.S. Silver Eagles, as told by the Wall Street Journal (free WSJ Digg link).

The government rationed food during World War II and gasoline in the 1970s. Now, it's imposing quotas on another precious commodity: 2008 dollar coins known as silver eagles.

The coins, each containing about an ounce of silver, have become so popular among investors seeking alternatives to stocks and real estate that the U.S. Mint can't make them fast enough. In March, the mint stopped taking orders for the bullion coins. Late last month, it began limiting how many coins its 13 authorized buyers world-wide are allowed to purchase.

"This came out of nowhere," says Mark Oliari, owner of Coins 'N Things Inc. in Bridgewater, Mass., one of the biggest buyers of silver eagles. With customers demanding twice as many as they did last year, Mr. Oliari would like to buy 500,000 a week. But the mint will sell him only around 100,000.


The rare shortage offers a glimpse into the growing love of a commodity known as "poor man's gold." With more silver mined than gold traditionally, silver has always been far cheaper than gold and today has less than 2% of gold's value.

But silver is growing in popularity, and some investors are betting that its value will surge as inventory shrinks. Big investors are loading up on silver eagles, which are the only American silver coins allowed in individual retirement plans. For small investors, they are an accessible way to get into the metal boom.

"Unlike gold, these coins can be bought by regular citizens," says J.R. Roland, a Brownsville, Tenn., judge who recently began buying the coins -- and trading them on eBay. "In these economic hard times, silver coins are a great way to invest."

While these coins are fun to collect and trade for numismatists, I don't think they make a great investment, even for the mass affluent segment. There are better ways to invest in metals, such as through ETFs or mining stocks. Since the U.S. Mint only sells the coins to wholesalers, individuals are always paying a markup over the real value of the silver in the coin.

The U.S. Mint makes silver, gold and platinum bullion coins in weights of 1/10, 1/4, 1/2 and 1 troy ounce. The gold and silver coins started being minted in 1986, and the platinum in 1998. They have face values on them and are legal tender, but the value of the metal in them is far greater than their face value, so it wouldn't be a good idea to use them at the grocery store. I think it would be a nice to have a complete set of the coins going back to 1986, but purely from a collector's, 'let's give it to the grandkids one day', point of view. Several other countries also mint some beautiful bullion coins, such as Canada and China.