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The evil paper traders are your precious metal dealers
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Thread: The evil paper traders are your precious metal dealers

  1. #1
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    Default The evil paper traders are your precious metal dealers

    Every precious metal dealer in business by now has hedged their gold and silver. How do I know? Because if they were buying anywhere above the current price for the past 5-6 years, and sold their metals to customer as the price went down, they would be losing their asses. To take an extreme example, when silver was above $40 range, they had to buy in order to fulfill the current and future orders. As the price went down to sub 20, which it has been for a while now, they would be losing massive amounts of money. So how do they stay in business? They have to hedge, or short the futures market. They short in the futures, and buy the physical to offset the price fluctuations so they can be net neutral and make money on the bid/ask spread for physical. One big retailer on the internet describes so in this link. https://www.jmbullion.com/gold-and-s...-infographic/#

    So the very people that many forum users here criticize as part of the problem, are in fact are shorting to be part of the solution for you, so that you can buy your precious metals. Otherwise, they'd be out of business by now. This is empirical evidence of how the futures market is a valuable tool to mitigate price fluctuations to satisfy customer demands for metals. Without a legitimate futures market, there would be no way to hedge, thus, the premiums of the metals you want would be sky high to offset the risk. This is empirical evidence, but I imagine that most people on here will not 1) Take the time to understand how the mechanism works, and/or 2) continue to be in denial because they just want to point the finger at someone else because they are not satisfied with the current financial system.

  2. #2
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    Quote Originally Posted by chroNick View Post
    Every precious metal dealer in business by now has hedged their gold and silver. How do I know? Because if they were buying anywhere above the current price for the past 5-6 years, and sold their metals to customer as the price went down, they would be losing their asses. To take an extreme example, when silver was above $40 range, they had to buy in order to fulfill the current and future orders. As the price went down to sub 20, which it has been for a while now, they would be losing massive amounts of money. So how do they stay in business? They have to hedge, or short the futures market. They short in the futures, and buy the physical to offset the price fluctuations so they can be net neutral and make money on the bid/ask spread for physical. One big retailer on the internet describes so in this link. https://www.jmbullion.com/gold-and-s...-infographic/#

    So the very people that many forum users here criticize as part of the problem, are in fact are shorting to be part of the solution for you, so that you can buy your precious metals. Otherwise, they'd be out of business by now. This is empirical evidence of how the futures market is a valuable tool to mitigate price fluctuations to satisfy customer demands for metals. Without a legitimate futures market, there would be no way to hedge, thus, the premiums of the metals you want would be sky high to offset the risk. This is empirical evidence, but I imagine that most people on here will not 1) Take the time to understand how the mechanism works, and/or 2) continue to be in denial because they just want to point the finger at someone else because they are not satisfied with the current financial system.

    That's how many dealers go bust with our money, as in Tulving. That's not to say some do not use the market to hedge their bets, but it is an insurance policy not a freebee and as such it is a cost of doing business. Large dealer can afford to hedge their bets assuming they are profitable.

    Sometimes they win and sometime they lose. But as it was explained to me by my local dealer which is not a major online dealer, they stay in business by replacing their inventory at todays prices when they sell their inventory at today's prices.

    They are buying it from their sources at a lower premium than what they are selling it to the public for. Thus they are able to maintain a constant level of inventory no matter which direction the market is heading and they live off the profit margins not gambling off the COMEX and end up losing their business.

    The smaller the dealer the harder it is to stay in business with these ups and downs without charging much higher premiums than everyone else without losing their a$$. They can't go out and buy replacement inventory every time someone comes in and buys a few ounces off the shelf. These smaller dealers are not likely to be hedging the market either as it's a pure gamble for them just as it would be for us.

    The perfect example of how this works is back when we had the so called retail shortage hit in one day. Every dealer closed shop and said they were sold out, it wasn't true. I called my local coin dealer and that's when he informed me of what was really going on. There was a shortage at the manufacturing level and no one could get firm commitment to orders at today's prices, so they stopped selling everything since they didn't know what they would have to pay to replace their existing stock if they sold it. Made perfect sense, who would sell their inventory at $15 not knowing if it would cost them $17 or $18 to replace it in three or four weeks. Only a couple places keep their doors open like NWTM and that was only because they had a direct supply of Silver from a mining company. To make matters worse at the same time, Johnson Matthey announced they were temporarily suspending the production of 100 ounce retail bars. Holy crap Batman what's going on!!!

    There was no shortage of Silver, just a scare that took over the entire retail market and everyone involved was taking their piece of the pie from the manufactures to the dealers with over inflated premiums, which is nothing new, they do it every chance they get....

    It doesn't matter if I bought the Silver I sold today at $40 an ounce and sold it for only $20 as long as I was able to buy replacement Silver from my supplier for say $19 or $19.50 depending on your markup. I still made a profit off the difference. On the other hand it doesn't work in the dealers favor when the price is rising and he paid $20 for the Silver he sold today for $30 and was able to replace it for $29 or $29.50 per ounce. He still made the same profit off the sale. So the dealer can always sell in either direction and make money as long as he can replace his inventory the same day without having to gamble on the COMEX casino Tulving style. The only way the dealer makes any extra money is if he can replace his inventory for much less than he sells it for. In a slumping market, a dealer might gamble and not replace the product he just sold hoping the price will keep dropping so he can buy even more inventory or take more profit off the table when he does. The only benefit to the dealer in a rising market is if he sells for a larger profit and doesn't replace the inventory.

    It doesn't matter if the price is rising or falling, the dealer can sell at any price as long as he can replace his inventory at a lower premium. It's just a matter of maintaining his inventory level. The value of that inventory rises and falls with the market, but he lives off the premiums from sales not the value of his stock. 100,000 once of Silver for sale is the same at $10 as it is at $50. The only time it's really any different is when he decides to go out of business, then it has a final value.

    People have been selling this concept of the dealers using the COMEX to hedge their bets so they can sell Silver to us at today's prices and that's a bunch of crap, it's still just an extra gamble some of them are playing as a means of making even more money. Take away their means of replacing their existing stock and they will shut their doors no matter how many shares they have on the COMEX.
    Last edited by valerb; 29th January 2017 at 14:21.
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  3. #3
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    I'm not saying what you're saying is incorrect about what the local PM dealers say and how they operate their business, but just connecting the dots here... And again I'm going to give another extreme example just to illustrate the point. Let's say that a PM dealer buys 1000oz of silver at a time. In the week of May 2nd 1011, silver prices went down 15 bucks. Say the retailer bought at $48, and it takes a week for him to sell 1000oz. By the end of the week, he could very well be losing $15 per coin bought. Maybe $12 if he charged a $3 premium. Unless I am not understanding you correctly, by not hedging, you are adding to the risk of price fluctuations. Sure, in an up market, you'd be making money, and in a down market, you'd be losing some, but you are at the mercy of the price fluctuation between the moment you place the order, to the moment you sell the order, and if the price moves down more than the premium you charge, you are at a net loss. Even if you charge, say $2.50 per oz premium, if the price moves $2, which it can very well do, you'd only be making $0.50 per ounce, which may not be enough to pay for the rent, overhead charges of the store, labor cost, and your own salary. By hedging that $48/oz order on May 2nd 2011 on the futures market, you won't need to care about the price at all because you will be making money on your futures contract all the way down. And you can still hedge as a mom&pop silver shop because they have mini silver contracts which are 1000oz, and you can even use the SLV as a vehicle if you want to hedge even less. If a PM retailer can't move 1000oz a week, then there's no point in being in business, as you can only make $2500 in gross profit per 1000oz, and that doesn't even include the SGA costs, interest on any debt, taxes, and one time expenses that need to be made, eg. repairs, shelves, safes, etc. I'm not saying that those kinds of shops don't exist where they don't hedge at all, but I'm saying it would be foolish to not take advantage of it in case price drops, customers don't come in the door because price is going down, and only come in the door when they think silver is at a bottom, etc. The silver retailer who buys based on what he thinks the supply/demand will be in his doors is the gambler, not the hedger.

  4. #4
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    Quote Originally Posted by chroNick View Post
    I'm not saying what you're saying is incorrect about what the local PM dealers say and how they operate their business, but just connecting the dots here... And again I'm going to give another extreme example just to illustrate the point. Let's say that a PM dealer buys 1000oz of silver at a time. In the week of May 2nd 1011, silver prices went down 15 bucks. Say the retailer bought at $48, and it takes a week for him to sell 1000oz. By the end of the week, he could very well be losing $15 per coin bought. Maybe $12 if he charged a $3 premium. Unless I am not understanding you correctly, by not hedging, you are adding to the risk of price fluctuations. Sure, in an up market, you'd be making money, and in a down market, you'd be losing some, but you are at the mercy of the price fluctuation between the moment you place the order, to the moment you sell the order, and if the price moves down more than the premium you charge, you are at a net loss. Even if you charge, say $2.50 per oz premium, if the price moves $2, which it can very well do, you'd only be making $0.50 per ounce, which may not be enough to pay for the rent, overhead charges of the store, labor cost, and your own salary. By hedging that $48/oz order on May 2nd 2011 on the futures market, you won't need to care about the price at all because you will be making money on your futures contract all the way down. And you can still hedge as a mom&pop silver shop because they have mini silver contracts which are 1000oz, and you can even use the SLV as a vehicle if you want to hedge even less. If a PM retailer can't move 1000oz a week, then there's no point in being in business, as you can only make $2500 in gross profit per 1000oz, and that doesn't even include the SGA costs, interest on any debt, taxes, and one time expenses that need to be made, eg. repairs, shelves, safes, etc. I'm not saying that those kinds of shops don't exist where they don't hedge at all, but I'm saying it would be foolish to not take advantage of it in case price drops, customers don't come in the door because price is going down, and only come in the door when they think silver is at a bottom, etc. The silver retailer who buys based on what he thinks the supply/demand will be in his doors is the gambler, not the hedger.

    That is a misleading statement that any dealer can hedge their stash and not lose any money, it cost money to hedge your bet on the market, it's not free.

    What if the market moves in the opposite direction, it's a waste of money, or if it is stagnant it becomes a waste of money. It takes money to play the market to hedge your investment.

    Now to specifically go back to answering your question again, I'll assume a dealer goes into business with only 1,000 ounces of Silver in mind to make this more simplified.

    He buys into the system at $48 an ounce, so his total investment is $48,000 not counting any other items that all business have to purchase when they are a start up as in shelves, display cases and such.

    The spot price of Silver drops all the way down to $30 an ounce and he hasn't sold a single ounce. His investment is now only worth $30,000, but that doesn't really matter as it's just a number that is designed to last him for the next 20 years in business selling that 1,000 ounces of Silver over and over again, while living off the spread between his sell price and his buy price on the same day.

    So we have a small time dealer which only carries 1,000 ounces of bulk Silver along with his life long hoard he's been collecting of a wide variety of any and everything, including stamps, comic books and playing cards.

    I come into his shop today and want to buy 100 ounces of his bulk one ounce rounds. He sells them to me at $31.50 an ounce because he's a small time dealer and I don't know any better or I'd be online buying them for a much better deal.

    He's such a small time dealer he doesn't really get any real breaks from his contacts, but he has his sources and knows where the best deals are at any time. So he places his own online order to replace his existing stock of inventory of 100 ounces for $30.65 per ounce which includes free shipping and he ends up making $85 on the deal.

    Several day's later his shipment of 100 ounces arrives and he is back to his original 1,000 ounce inventory level and $85 of profit made by selling Silver for $16.50 per ounce less than he bought it for and never spent a dime gambling on the futures market trying to hedge any potential losses that are unnecessary when your living off the spread and not gambling on the markets.

    The point is, the dealer isn't looking at the value of his inventory rising and falling, but the level of his inventory rising and falling that can make a difference in his survival.

    The same scenario is the same no matter if the price of Silver jumped to $75 an ounce and he sold 100 ounce for $76.50 per ounce. As long as he replaces his inventory at the same time at $75.65, he still makes the same $85 profit.

    Now some might say, why would he do that and not keep all the difference between $48 and $76.50 for a profit. It's a simple answer, if he wants to stay in business selling Silver, the next time he wants to buy more, it might cost $85 an ounce and now where would he be as far as running his business and maintaining a stock of inventory.

    He could keep selling for even greater profits as the price of Silver rises, but eventually he would be right back where he started. He would have a much larger stash of cash, but no Silver. It would cost him far more than he has in cash to replace that 1,000 ounces of Silver to start over again unless there was a serious correction in the spot price. That is why dealers have to replace their inventory even when the price is moving up as well as when it's moving down, they never know what the price will be an hour from now or tomorrow. A lot of times they gamble on it just like the rest of us and lose just like the rest of us. The ones that never take that gamble stay in business as long as they have enough business to keep them going.

    But don't confuse any regular business you see on a shopping strip with what the average coin shop has to pay for expenses to stay in business. I'll bet there are at least a thousand if not more coin dealers in the United States of different levels of involvement. It's one thing to talk about a bullion dealer that is doing most of his business selling nothing but bullion, but that is not the case for the majority of the coin shops from coast to coast. You find them any and everywhere from small tiny dumpy individual standalone store fronts to older shopping centers to individuals homes setup for sales. A lot of these are part time business and available by appointment only as they have other jobs. Most are multi-functional places involving other collector items to help keep them in business and most are run by individuals that have seen this as a hobby most of their lives and are making it a living the best they can one way or another. I've known some on the internet sites where one spouse works the shop and the other has a regular job and then they switch places so the one can take the coin shop on the road to the local coin show or regional coin shows wherever they happen to be that weekend. It's a life style that is tough to survive just like any other small business.

    The larger dealers who have more invested and are able to maintain larger quantities of on hand inventory are able to get involved in these online deals which then become more productive, but more competitive as well, but the game plan is still the same. If you want to gamble on the futures market to hedge your plays, your likely to end up like Tulving who apparently did just that from what has been reported.

    But the point of saying it takes x number of dollars per week or month in profits to keep the doors open is a true statement, but your figures are only true if your looking at keeping them open in a competitive shopping center and most dealers do not do that much business they can afford such luxury.

    The need for a large security safe is only required if your storing large amounts of Silver and most small shops do not have that kind of problem. Yes they need some protection but not the upright massive safes your thinking of.
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  5. #5
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    That is a misleading statement that any dealer can hedge their stash and not lose any money, it cost money to hedge your bet on the market, it's not free.

    What if the market moves in the opposite direction, it's a waste of money, or if it is stagnant it becomes a waste of money. It takes money to play the market to hedge your investment.

    It's $6 per round to hedge silver futures per contract. Mini contracts are 1000oz, while normal contracts are 5000oz. If you're selling a lot more than that, as a retailer, you're doing wel enough to hedge a cost of $6 per contract. I don't see how this is that expensive. The risk mitigation outweighs the measly $6 per round contract lots.

    Now to specifically go back to answering your question again, I'll assume a dealer goes into business with only 1,000 ounces of Silver in mind to make this more simplified.

    He buys into the system at $48 an ounce, so his total investment is $48,000 not counting any other items that all business have to purchase when they are a start up as in shelves, display cases and such.

    The spot price of Silver drops all the way down to $30 an ounce and he hasn't sold a single ounce. His investment is now only worth $30,000, but that doesn't really matter as it's just a number that is designed to last him for the next 20 years in business selling that 1,000 ounces of Silver over and over again, while living off the spread between his sell price and his buy price on the same day.

    So we have a small time dealer which only carries 1,000 ounces of bulk Silver along with his life long hoard he's been collecting of a wide variety of any and everything, including stamps, comic books and playing cards.

    I come into his shop today and want to buy 100 ounces of his bulk one ounce rounds. He sells them to me at $31.50 an ounce because he's a small time dealer and I don't know any better or I'd be online buying them for a much better deal.

    He's such a small time dealer he doesn't really get any real breaks from his contacts, but he has his sources and knows where the best deals are at any time. So he places his own online order to replace his existing stock of inventory of 100 ounces for $30.65 per ounce which includes free shipping and he ends up making $85 on the deal.

    Several day's later his shipment of 100 ounces arrives and he is back to his original 1,000 ounce inventory level and $85 of profit made by selling Silver for $16.50 per ounce less than he bought it for and never spent a dime gambling on the futures market trying to hedge any potential losses that are unnecessary when your living off the spread and not gambling on the markets.

    The point is, the dealer isn't looking at the value of his inventory rising and falling, but the level of his inventory rising and falling that can make a difference in his survival.

    The same scenario is the same no matter if the price of Silver jumped to $75 an ounce and he sold 100 ounce for $76.50 per ounce. As long as he replaces his inventory at the same time at $75.65, he still makes the same $85 profit.

    Now some might say, why would he do that and not keep all the difference between $48 and $76.50 for a profit. It's a simple answer, if he wants to stay in business selling Silver, the next time he wants to buy more, it might cost $85 an ounce and now where would he be as far as running his business and maintaining a stock of inventory.

    Makes sense. I never thought about it this way. I can see how smaller shops won't have the need to hedge.

    Having said that, there is still risk for both small shops and large shops. To take the example you gave of buying 1000oz at $48, and then the price going down to $30. You come in and buy 100oz at $31.50. He wants to replenish the order of another 100oz, but he can't because they've suspended sales for one reason or another, or the wholesaler isn't committing to an actual price. Then what? Then I suppose he wouldn't sell it to you because he couldn't immediately replenish the order. If he did, then he'd be gambling, because if the price goes up above 31.50, then he'd be losing on that transaction. What he could do is immediately buy 100oz on the paper markets at $30. If the price goes to $35 when wholesale sales start, then he'd make $5/oz on the paper trade. He'd sell it and then buy the $35 physical.

    And what if his business is growing? He sets up shop in the beginning and buys the 1000oz at $48, and the price goes down. He employs your strategy of selling ounces and immediately replenishing them, but one morning, the physical market believes prices have hit a bottom, and he sells out the 1000oz, and silver is at $12 an oz. He buys more inventory, but this time, he buys 2000oz, and then sells out the following day at $8 because prices have gone down even more. Although on his income statement, he's making $1 or so per ounce that he's selling and profiting 1000s of dollars, but on his balance sheet, he is completely wrecked if he had used debt to start up his business. The $48000 initial investment at $48 is gone, and now he's paying interest on the $48000. Had he hedged at $48, and sold his hedges as customers came in to buy, his balance sheet would be neutral.


    The larger dealers who have more invested and are able to maintain larger quantities of on hand inventory are able to get involved in these online deals which then become more productive, but more competitive as well, but the game plan is still the same. If you want to gamble on the futures market to hedge your plays, your likely to end up like Tulving who apparently did just that from what has been reported.
    I'm not familiar with the Tulving story. But regardless, I still fail to see how they are gambling if they are hedging. It's basically employing the same strategy you described.

    But the point of saying it takes x number of dollars per week or month in profits to keep the doors open is a true statement, but your figures are only true if your looking at keeping them open in a competitive shopping center and most dealers do not do that much business they can afford such luxury.

    The need for a large security safe is only required if your storing large amounts of Silver and most small shops do not have that kind of problem. Yes they need some protection but not the upright massive safes your thinking of.
    I don't know how big of safes you're talking about but I did go to a local precious metals bullion dealer... yes he sold other things besides bullion, but mainly bullion... and he did have a gigantic safe. After all, he'd need to put money in there. If he sells a couple thousand ounces in a day, that's $30,000 worth, plus all the other inventory that he may have that he wants to keep locked up.

  6. #6
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    As I've said in the past, I've never dealt with the options part of the commodities aspect of the COMEX. I have only been interested in how the contracts worked, deliveries made and how the COMEX warehouses were maintained and what inventory was actually in them, both on and off the public records.

    The last I knew of options contracts they cost $50 back in 2012 for a 5,000 ounce contract. What I don't know is how it worked. That $50 only represents 1 cent per ounce for a payoff so there has to more involved that putting down $50 or $30 as you say today. However you don't need to be a bullion dealer of coin shop owner to play options on the COMEX or for that matter to actually go hog wild and play with actual contracts, it all cost money no matter how it works and there is no such thing as a sure thing that can't lose in the options either or everyone would be doing it and no one would be backing it.

    And hedging your investment with contracts or options is not the same as buying and selling your inventory at the same spot price, especially if your dealing with small inventory levels and or small margins.

    Any dealer that goes into business with a loan is only asking to be one of the high fatality rates in all business startups.

    That being said, it doesn't make any difference how much you paid for your inventory in the beginning as it was a startup cost just like your shelving and everything else.

    It does matter how you handle your replacement of any inventory you sell in the future as that is you livelihood forever.

    Selling inventory today at $31.50 and replacing it at $30 is not the same as buying any COMEX contract of any type that you can sell for $35 later and buy Silver at $35 to replace the $30 Silver you could have bought back when. It's still the same amount of Silver on your shelf. The only difference is, you paid some broker a fee of some type for the privilege of buying it later at a higher price which was an additional and unnecessary cost.

    A dealer can increase his investment by adding inventory at any time, but that takes additional cash, either from his bank account or from his profits unless he's taking a chance and gambling on the direction of the market in the case of falling prices and not replacing his sales while waiting for lower prices and greater inventory. Of course if the opposite takes place, he then ends up with less inventory when he faces reality.

    Think of it this way, why should any of us buy physical inventory, pay high premiums in many cases, plus worry about storage when we can simply play the options market for next to nothing and make a killing and never have to store a single ounce of this crap that will only tarnish if we stash it long enough.

    Plus as someone that has stored large amounts of Dollars and Swiss Francs, it doesn't take all that much space. You really don't need a large safe, but anyone that is selling 2,000 ounces of Silver in a single day in cash has got one hell of a walk-in business or is laundering cash for some unsavory characters, but they are probably not going to be in business for long before the government closes in on them. For that matter any dealer that has 2,000 ounces laying around is not your basic coin dealer either, but a full fledged bullion dealer. Yes you can probably find a number of dealers that can muster up 2,000 ounces of combined Silver at one time without clearing off the shelves, but they are a small percentage of the population. And to find those that can provide 2,000 ounces of the same product are in the small minority and probably online in most cases. Even all the online dealers do not carry inventory levels that large. Most of the largest bullion dealers are not open to the public at all, but black holes that you send your money to and they send product back, hopefully. That's where long established reputations come in handy, like Tulving and Bullion Direct.

    However I do agree that for those dealers that do store large quantities of bullion that is not on display, they need ample storage capacity in a safe or vault. My local bullion dealer here in the Atlanta area has a very large safe, has been the largest for a few decades and he never carried any quantity of small Silver products. Large bars up the ying yang, bags of coins, Gold coins and lots of small Silver on display. He'll order whatever you want, but he won't carry a bunch of small generic Silver in volume. His words of wisdom, you can play the market, but you can't beat it, you either live off your profits or you die. At least those are the words he passed on to me and he probably heard it himself many times before I come along. One thing is for certain, there is a long list of brokers and coin dealers that have gone bust while taking client money with them.

    I know there has to be 4 or 5 times as many dealers in the Atlanta area as there were 15 years ago, which probably indicates how broad the market has grown in the time period across the nation. I just wonder how many of them have gone bust in the same time frame, especially trying to out guess the market with their buying and selling or playing on the COMEX, rather in futures or just option contracts. I remember back on this site in 2010 when a number of members got smart and sold some part of their stash in the fall of 2010, because they were sure it was going to come right back down any day and some of them bought back in at higher prices afraid they were being left behind because the train finally left the station.
    Last edited by valerb; 10th February 2017 at 01:34.
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  7. #7
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    Thumbs down Going Down?

    The silver charts look like the spot price of silver is ready to take a nice dive.
    I visited my coin store for the first time in four years to get a little of precious and to take a silver virgin there.
    This act alone should drop the price by a buck.
    My friend already shows signs of a possible silver addiction, so I'm thinking that the expected price plunge right after her first buy of silver eagles should curb her eagerness.
    With the spot at $18, the $21 per 2017 ASE is about what I expected, about 2/3 the average $30 price that I had to sell at back in four years ago.

    We'll go back next month and I expect to get some more at about the same price, after a brief dip under $17.
    "I foresee little future in 'the price of silver', I see a huge future for 'the price in silver'." - heartbone
    "The truth is called hate by those who hate the truth." - K

  8. #8
    Join Date
    May 2007
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    Atlanta
    Posts
    9,127

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    Quote Originally Posted by silverheartbone View Post
    The silver charts look like the spot price of silver is ready to take a nice dive.
    I visited my coin store for the first time in four years to get a little of precious and to take a silver virgin there.
    This act alone should drop the price by a buck.
    My friend already shows signs of a possible silver addiction, so I'm thinking that the expected price plunge right after her first buy of silver eagles should curb her eagerness.
    With the spot at $18, the $21 per 2017 ASE is about what I expected, about 2/3 the average $30 price that I had to sell at back in four years ago.

    We'll go back next month and I expect to get some more at about the same price, after a brief dip under $17.

    If you can find a coin shop only charging $3 over spot for single ASE's, that's a better deal than you can find at most of the online dealers and without shipping charges.

    Not as good as the $2.29 over at SD Bullion, but for really small quantities, the shipping charge becomes hard to overcome.
    I'm a proud member of Eggshellman's Liar, Shill, and bully club and a new member of the Super Jew Defense League!!!

  9. #9
    Join Date
    Dec 2008
    Location
    Michigan
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    811

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    Quote Originally Posted by valerb View Post
    As I've said in the past, I've never dealt with the options part of the commodities aspect of the COMEX. I have only been interested in how the contracts worked, deliveries made and how the COMEX warehouses were maintained and what inventory was actually in them, both on and off the public records.

    The last I knew of options contracts they cost $50 back in 2012 for a 5,000 ounce contract. What I don't know is how it worked. That $50 only represents 1 cent per ounce for a payoff so there has to more involved that putting down $50 or $30 as you say today. However you don't need to be a bullion dealer of coin shop owner to play options on the COMEX or for that matter to actually go hog wild and play with actual contracts, it all cost money no matter how it works and there is no such thing as a sure thing that can't lose in the options either or everyone would be doing it and no one would be backing it.

    And hedging your investment with contracts or options is not the same as buying and selling your inventory at the same spot price, especially if your dealing with small inventory levels and or small margins.

    Any dealer that goes into business with a loan is only asking to be one of the high fatality rates in all business startups.

    That being said, it doesn't make any difference how much you paid for your inventory in the beginning as it was a startup cost just like your shelving and everything else.

    It does matter how you handle your replacement of any inventory you sell in the future as that is you livelihood forever.

    Selling inventory today at $31.50 and replacing it at $30 is not the same as buying any COMEX contract of any type that you can sell for $35 later and buy Silver at $35 to replace the $30 Silver you could have bought back when. It's still the same amount of Silver on your shelf. The only difference is, you paid some broker a fee of some type for the privilege of buying it later at a higher price which was an additional and unnecessary cost.

    A dealer can increase his investment by adding inventory at any time, but that takes additional cash, either from his bank account or from his profits unless he's taking a chance and gambling on the direction of the market in the case of falling prices and not replacing his sales while waiting for lower prices and greater inventory. Of course if the opposite takes place, he then ends up with less inventory when he faces reality.

    Think of it this way, why should any of us buy physical inventory, pay high premiums in many cases, plus worry about storage when we can simply play the options market for next to nothing and make a killing and never have to store a single ounce of this crap that will only tarnish if we stash it long enough.

    Plus as someone that has stored large amounts of Dollars and Swiss Francs, it doesn't take all that much space. You really don't need a large safe, but anyone that is selling 2,000 ounces of Silver in a single day in cash has got one hell of a walk-in business or is laundering cash for some unsavory characters, but they are probably not going to be in business for long before the government closes in on them. For that matter any dealer that has 2,000 ounces laying around is not your basic coin dealer either, but a full fledged bullion dealer. Yes you can probably find a number of dealers that can muster up 2,000 ounces of combined Silver at one time without clearing off the shelves, but they are a small percentage of the population. And to find those that can provide 2,000 ounces of the same product are in the small minority and probably online in most cases. Even all the online dealers do not carry inventory levels that large. Most of the largest bullion dealers are not open to the public at all, but black holes that you send your money to and they send product back, hopefully. That's where long established reputations come in handy, like Tulving and Bullion Direct.

    However I do agree that for those dealers that do store large quantities of bullion that is not on display, they need ample storage capacity in a safe or vault. My local bullion dealer here in the Atlanta area has a very large safe, has been the largest for a few decades and he never carried any quantity of small Silver products. Large bars up the ying yang, bags of coins, Gold coins and lots of small Silver on display. He'll order whatever you want, but he won't carry a bunch of small generic Silver in volume. His words of wisdom, you can play the market, but you can't beat it, you either live off your profits or you die. At least those are the words he passed on to me and he probably heard it himself many times before I come along. One thing is for certain, there is a long list of brokers and coin dealers that have gone bust while taking client money with them.

    I know there has to be 4 or 5 times as many dealers in the Atlanta area as there were 15 years ago, which probably indicates how broad the market has grown in the time period across the nation. I just wonder how many of them have gone bust in the same time frame, especially trying to out guess the market with their buying and selling or playing on the COMEX, rather in futures or just option contracts. I remember back on this site in 2010 when a number of members got smart and sold some part of their stash in the fall of 2010, because they were sure it was going to come right back down any day and some of them bought back in at higher prices afraid they were being left behind because the train finally left the station.
    Why are you talking about options? I was talking about buying/shorting a futures contract. It doesn't cost $50. For my broker, its $2.50 per side, so $5.00 for a round turn for one transaction, which is dirt cheap, and there are different sizes you can short from the standard contract to the mini contract. You can even use SLV as a vehicle to short, and pay $1.00 per side in some discount brokerages. Obviously shorting SLV for 5oz wouldn't make much sense, but any bullion dealer that sells 100s of ounces per day should have no reason not to do so.

    I don't understand how you are confusing hedging as gambling. By definition, hedging is not gambling. It is price protection. And again, I get it for very small time bullion dealers, it wouldn't make much sense, and the way you described on how they can replenish their orders as soon as they sell their orders makes total sense and would in fact be the best way of managing inventory. Having said that, the brick and mortar shops that you have described seems small, and I have never came across such small shops like that. I've only bought from online in the past, and as for going to a retail store, I've been to 1 in Japan, and when I went there, an old woman was in front of me buying 10oz of gold and spent roughly $8,000 worth to buy it so they had to have been dealing a decent amount of volume, and at that rate, it makes sense to hedge if 1) You wanted to get into the bullion business using a loan (because it will offer price protection so that you don't have to risk the principal putting your initial business investment in inventory). Borrowing money to set up a business isn't a pure gamble if you are incorporating proper risk management. I'm not saying that people won't go broke even if they do incorporate proper risk management, but with more risk management, it becomes less of a gamble, because risk equals gambling. 2) As you said, there are some days when they suspend silver/gold and won't let dealers buy at today's price. In this scenario, they will be risking by selling their current inventory, whereas if they had hedged, they can sell all of their existing inventory and be protected against market fluctuations and not have to close up shop, provided that they do enough volume/transactions per day to make it worthwhile so that all of their margins aren't being eaten up by trading commissions.

  10. #10
    Join Date
    Dec 2008
    Location
    Michigan
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    811

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    Quote Originally Posted by silverheartbone View Post
    The silver charts look like the spot price of silver is ready to take a nice dive.
    I visited my coin store for the first time in four years to get a little of precious and to take a silver virgin there.
    This act alone should drop the price by a buck.
    My friend already shows signs of a possible silver addiction, so I'm thinking that the expected price plunge right after her first buy of silver eagles should curb her eagerness.
    With the spot at $18, the $21 per 2017 ASE is about what I expected, about 2/3 the average $30 price that I had to sell at back in four years ago.

    We'll go back next month and I expect to get some more at about the same price, after a brief dip under $17.
    Where do you get these ideas that silver will go below $17 soon? I'm legitimately asking what lead you to this conclusion.

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