By Dr. Steve Sjuggerud

Friday, December 30, 2011

"What's the best way to buy silver?"

Over lunch, I asked the guy who would know... my longtime friend Michael Checkan of Asset Strategies International.

I've personally relied on Michael for his straight-up opinions since we first met in the 1990s. He's been a dealer of precious metals and foreign currencies for the last 44 years.

So who would know the best way to buy silver better than Michael?

One of Michael's favorite ideas today is "junk silver."

You buy junk silver for the low price and the convenience.

Junk silver isn't junk, really... It's simply U.S. silver coins minted before 1965 that have no collector's value today. They were widely circulated and exchanged hands thousands of times, so they show a lot of wear. Some have estimated there are more than 13 billion of them around the country. Junk silver is just valued for their metal content.

It doesn't matter if it's dimes, nickels, or quarters in a bag of junk silver coins... All these coins minted before 1965 contain 90% silver by weight.

The Coinage Act of 1965 removed most of the silver from its coins. So dimes, quarters, and half-dollars went from 90% silver to just 40% silver. And in 1970, Congress removed the rest of the silver from coins.

Right now, junk silver trades at a much lower premium over melt value than silver coins minted yesterday at the U.S. Mint.

Your typical one-ounce Silver Eagle coins produced yesterday at the U.S. Mint sell at a premium of about 10%-12% over their melt value. (Typically, the more coins you buy, the lower the premium over melt value you pay.)

But when you buy bags of junk silver coins these days, you pay a premium of only around 3%-4%.

You might think a 100-ounce bar of silver would sell for a lower premium over melt value than a bag of junk silver coins. But right now at least, that's not the case. Silver bars sell at a premium of between 4% and 5% over melt value.

Why are the old silver coins cheaper than the coins and bars minted yesterday? Refining silver and minting coins costs money... So the mints need to charge a premium over melt value. But those old silver coins already exist, no minting or refining required. Right now, supply and demand has kept the prices of junk silver coins cheap.

My friend Dr. David Eifrig (who writes the Retirement Millionaire newsletter) likes junk silver coins for their convenience in a worst-case scenario:

Silver is an easier and simpler metal than gold to use as money. If all hell breaks loose and China or crazy U.S. politicians debase the dollar, silver will be the better choice for transactions. After all, a one-ounce coin of silver is worth about $32. That matches up well with common prices of everyday goods.

Imagine trying to pay for an oil change... Wouldn't it be easier to hand the mechanic a couple of silver dollars than to borrow his metal cutters to shave off 2% of a $1,400 gold Krugerrand?

Plus, Doc points out, junk silver is "liquid." Because the silver content is so widely understood, you can easily sell them to dealers or on eBay.

One thing you need to know about bags of silver coins: They're darn heavy.

You typically buy junk silver in "$1,000 face value" increments. That works out to over $21,000 for the bag... and it weighs something like 55 pounds. (As my friend the late Burt Blumert from Camino Coins used to tell me, "The hernia comes free with each bag.")

The bag itself could be made up of 10,000 dimes, 4,000 quarters, or 2,000 half-dollars. But whatever it is, the amount of silver is around 720 ounces per bag.

But if you like the idea of junk silver, Michael Checkan is kind enough to break the bags down into smaller increments... A $100 face value bag is one-tenth that size. It costs around $2,200 and weighs just 5.5 pounds.

Michael says bags of junk silver are the best way to get started in owning actual precious metals. They're cheaper than American Eagle silver coins, and they're more practical (and surprisingly cheaper) than silver bars.

For more on my longtime friend Michael and his business, visit www.AssetStrategies.com. As always, I receive no compensation for mentioning Asset Strategies. They've just proven to treat my readers right over many years.

Good investing,

Steve

Market Notes

A YEAR-END LOOK AT "SUPER-CONCENTRATION," PART 4

Today's piece is the fourth in our year-end series on the dangers of a "super-concentrated" portfolio. It shows how the correlation bogeyman has even grabbed ahold of trees.

Owning productive timberland has traditionally been a great portfolio diversifier. Trees don't care about a "flash crash" or the Nasdaq, they just keep growing. And buying the stuff at a good price in a private deal is always a good idea. Even publicly traded timberland stocks typically provide portfolio diversification.

But as you can see from today's chart, timberland stocks are also moving in lockstep with the overall market...

Below is a two-and-a-half-year chart that plots the performance of the benchmark S&P 500 stock index (black line) alongside two of the largest timberland stocks, Plum Creek Timber (green line), and Potlatch (blue line). Both Plum Creek and Potlatch own huge swaths of American timberland... and both sport extremely similar price action to the overall market. Even timberland is moving in the "risk on, risk off" trade these days...