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Why are silver premiums so high?

One of the most common questions for investors looking at silver is why the premiums are so high compared to other precious metals. If we take a look at an ounce of each metal at the time of writing, the premium above spot price for a 1oz bar of each would be as follows:

Gold – 7%

Platinum – 38%

Palladium – 40%

Silver – 80%

It is of course worth bearing in mind that these figures can vary significantly depending on market conditions, as well as between the products chosen and quantities being purchased – as many dealers will offer reduced premiums for larger orders.

Even with these considerations however it is clear to see that silver has a much bigger premium at purchase, especially when compared to gold. This means investors would need the silver price to rise further before making their money back and hitting profit.

Below then we look at why silver premiums are so high, and what it means for those interested in investing in the alternative precious metal.

Why is the premium on silver so high?

One of the reasons the premium on silver is so high compared to gold is the mining and refining costs. Companies involved in silver mining rarely do so as their main objective. The value of silver is already lower than many other metals, but more importantly it is rarely found on its own. Instead, silver is almost always found in alloys with various other metals.

Mined Silver

Compared to gold then, this means silver can be found with other beneficial products, but also requires separating and further refinement compared to gold.

Even once refined into pure silver, this then needs to be turned into bars or coins, and silver’s unique properties once again make this difficult, contributing to the premium on silver being high. Pure silver is very soft and malleable, making it difficult to shape. A process known as ‘work hardening’ helps make the metal less malleable, but must be carefully done to avoid breaking the silver. This adds to the manufacturing costs for mints and refiners.

One of the most important things to consider with silver premiums are the fixed costs of production and supply, and the impact they have on a lower value metal like silver. As an example, let’s assume a fixed cost of £5 to produce and supply a coin; striking the coin, packaging, insurance, delivery, staff, energy, machinery maintenance, and the numerous other costs involved for any business.

Adding a £5 production cost to a gold coin worth £1,500 is only 0.3% on top. For silver at £15 per ounce for example, that would be a huge 33% to add to the price of the coin. These numbers are estimates only of course; the real figures may be lower, or with costs for businesses soaring due to high inflation, they may indeed be higher. In either case, they help demonstrate why silver struggles with such high premiums.

Should silver rise in value significantly in the future, these premiums could therefore reduce, as the fixed costs become less obtrusive to the value of the coins. This would of course have the adverse affect however of making VAT more of an issue. VAT on a £50 coin would add £10, while VAT on a £100 coin would add £20 and so on. A higher silver spot price would reduce premiums, but increase VAT.

Low premium silver

Buying low premium silver is of course the ideal for investors wherever possible, and there are a few options that may be available.

New silver is VAT applicable in the UK, another important distinction between the two main precious metals. In the 80% silver premium figure given at the start of this page, 20% is VAT, and could therefore represent a big reduction in price if VAT were removed. It can therefore be useful to check if a dealer offers second-hand silver, or has VAT-free storage options available, both of which can help you to buy low premium silver.

Second Hand Silver Bars

Silver ETF’s and other forms of paper silver can offer low premiums, as they remove some of the fixed costs for production and supply. There are drawbacks however of course, as with any ETF. First and foremost, you will not own the silver you buy. It is owned and managed by another company, adding third-party risk to your investment. Mismanagement, unscrupulous business practices, or simple economics could result in the company providing the ETF closing down, and you may not be protected in these instances.

Depending on whether the contract is allocated or unallocated, even the company may not own all the silver they are selling!

Physical ownership tends to be the preference for most investors. Holding your coins or bars in your hands is always an enjoyable experience, and is the ultimate expression of control in an increasingly cashless and regulated society. Having the silver in physical form allows you to store, sell or give away your goods per your choice.

Some physical silver may also command a premium with collectors when selling in the future that can help offset the initial purchase premium, though a collectable coin should always be considered separately to an investment.

Ultimately, the much lower initial cost, and the high potential for gains means that many investors believe silver can outpace the premium and still be a profitable investment – especially for a longer-term investment. Silver does often move quite quickly, with significant rises and falls that can present buying and selling opportunities for investors. Low premium silver though is certainly a good thing to look for, and will help your investment go much further.

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