Modern commodity markets are strange beasts, in a way, since when they operate at a certain level, they begin to trade the price of commodities rather than the commodities themselves – setting the cart before the horse, to borrow a well-worn, homely simile. The effects of this are sometimes unexpected, as, for example, in the case of oil, which has remained astronomically high not because of supply and demand, but because of gambling on the commodity markets.
In effect, the price of oil (and its derivatives, such as gasoline) has been set not based on how much oil is available or how much is being used, but is being determined almost independently of the commodity itself. The price is being set as a separate financial commodity, which then determines the actual price of the oil – a strange and interesting situation.
If you are to understand the price that you are paying for silver, it is necessary to get at least a rough grasp of how the commodity markets work as related to spot price. As the example of oil shows, the prices of a commodity are affected by factors that an outside observer would not necessarily be privy to. First of all, it is necessary to grasp what spot price is, and secondly, the question that arises is how to buy silver at spot price.
What Is Spot Price: A Detailed Explanation
Commodity markets are as concerned with future value as with present value, if not more so. Much of the justification for their existence is that they give suppliers and purchasers of these commodities a hedge against future price changes – that is, the prices are decided beforehand, even though the goods are not bought at that time. A commodity contract is an agreement to buy a commodity at a specific price when the contract matures, regardless of how much the actual price of the commodity rises or falls in the meantime.
The reason people will buy and sell these contracts is that the provider of the commodity wants to ensure they will be paid a certain price for it even if the actual price falls in the meantime. The holder of the contract, by contrast, is hoping that the actual price will rise, meaning they can buy the commodity at the lower price that they are contractually able to purchase it at thanks to the futures contract, then resell it for the new, higher price, earning the difference between the contractual price and the real price.
The actual situation is actually somewhat more complex, since the investor typically never actually buys the commodities, but sells the contract to a third party who actually wants the commodities before it matures. Also, “put” options are possible, which are a form of selling short – selling a commodity contract that you do not actually own now on the assumption that the price will fall, and that you can then buy the contract at a lower price and earn the difference between what you sold it for before you owned it, and the price you were actually able to buy it for.
Spot price for any commodity is the price you would have to pay at this specific moment to obtain the commodity. Spot price is, in effect, the commodity’s “right now” price. This does not mean that it exists in isolation from commodity market trends, however. Spot price for a non-perishable commodity like silver is strongly affected by the expected future spot price. In short, if silver speculators think that silver is likely to have a spot price of $200 per ounce in the future, then they will bid up the current spot price as they buy silver futures which they hope to resell when the price spike they foresee occurs.
Spot price increases do not necessarily mean that there is a higher demand for silver right now (though that can also have an effect). They can also occur because commodity traders are expecting a higher future spot price. Their expectations are a fairly good gauge of what to expect, and since silver spot price has been gaining strongly overall, it is a good sign that spot prices will likely rise in the future – making silver the excellent investment that it is.
How to Buy Silver at Spot Price
Most of the silver on the market today is sold with a premium above spot. In the case of collectible coins, the premium above spot can be enormous, sometimes several times greater than the spot value of the silver, or, in some cases, ten times or more. This is only natural, since everyone you are buying from wants to make a profit, too. However, the closer you can buy silver to the current spot price, the bigger your profit margin will be. Ideally, you could buy silver at spot for the best investing results.
The closest silver to spot from many dealers consists of silver round and silver bars. Bullion coins always have a heftier premium over spot because they have more collectible value. Therefore, you should not be looking to the official mints if you are trying to shave down your premium as low as possible.
The main method of obtaining silver at spot price, or even slightly below, is to find a reputable dealer who sells bags of “junk silver” – which are heavily worn silver coins from the early to mid twentieth century, which are in too bad shape to be worth the effort of reselling individually, but are not old enough for their value to skyrocket like even heavily worn coins from earlier periods.
Buying junk silver is somewhat risky even with a highly honest and reputable dealer, of course. There is always the possibility that counterfeits or seriously eroded coins have slipped through, reducing the actual weight of silver to some extent.
It is also difficult to buy junk silver because there is heavy competition for it, and much of it has already been snapped up by other people who want to buy silver at or below spot. You can also attend auctions, flea markets, and the like to try to obtain silver at less than its current spot price. In this case, people may be selling the metal for less than its worth, based on ignorance of the actual price they could get for it. It is your decision whether or not you want to take advantage of the opportunity this provides.
In short, there is no surefire way to find silver to buy at spot price. There is a chance that you will be able to do so, but it is also quite likely you will have to pay at least some premium for all your purchases.