EBay: Silver Trumps Gold

NEW YORK ( TheStreet ) -- In the battle between gold versus silver, silver shines with investors, according to recent data from eBay ( EBAY), and coin dealers expect this trend to continue in the second half of the year.

Demand for silver bullion items ranging from coins to bars has consistently outpaced gold from 2007 through the first-quarter of 2011, according to data collected by eBay. Although gold demand grew 60% on the auction site from 2007-2010 and silver demand grew only 40%, in total there were 1.8 million more silver items sold than gold ones.

"Silver has been growing significantly faster than gold," says eBay. "Based on the buyers we have spoken with, we believe this is because silver is at a much more accessible price point than gold." It takes 42 ounces of silver to buy 1 ounce of gold, which means retail investors looking for a bargain might be more apt to tap the cheaper metal.

In the first-quarter of 2011, this trend continued at a gangbuster rate with silver buyers beating out gold buyers by two times in the first quarter. EBay says that almost half of these buyers were first timers. "One new buyer we spoke with started investing in precious metals after he was unable to obtain a mortgage. He felt precious metals were a better option than putting his money in his savings account because of the increase in spot price."

Silver trumping gold looks set to continue. According to Commerzbank, the U.S. Mint said silver coin sales reached 22.3 million ounces in the first half of the year, the highest level since 1986, compared with a 14.4% drop for gold coins.

"The last 6 months have been really very strong for silver with the increased price," says Scott Thomas, president and founder of American Precious Metals Exchange, which buys from the U.S. Mint. "It's been as strong as I can ever remember."

Thomas does admit that demand has slacked over the last 6 weeks as gold and silver recover from a steep selloff in May and enter a seasonally slow buying period. But "as summertime comes to an end," argues Thomas, "focus will be back into the metals."

With demand currently slack, premiums decrease as well. The conventional premium on a one ounce bullion coin is 5% to 10%. Coins typically come out of the national mint, where they are made, at a 4% mark up and the retailer's margin is 1% to 3%.

To calculate the premium subtract the spot price from the price you are being quoted, divide that number by the spot price and multiply by 100.

Like the chart shows above, as of 7/7/2010, a one ounce gold bar at Kitco.com sells for $1,559. Using the spot price of $1,531.90, the bar has a 1.7% mark-up, which means that the gold price only has to rise 1.7% from current levels for you to break even on your investment.

At the height of buying in April, Thomas says premiums were as high as 15%. As demand picked up the U.S. Mint couldn't deliver enough product, which sent worries of a supply crunch rippling through the precious metals community and thereby creating more demand.

Thomas currently sees premiums back around 10%, "premiums seem to be settling down right now ... the U.S. Mint seems to be catching up with demand." The U.S. Mint opened up another production facility in San Francisco and took on another blank supplier to help it ramp up supply.

Pat Heller, general manager of Liberty Coin Service, says premiums for silver and gold products rose to 12% during the buying frenzy in 2011 but are now down around 8%.

Premiums on eBay, however, are still high. As of July 8th, you could buy a silver American Eagle for 16.5% over the spot price, 8.8% for the same item in gold. Both the premiums include shipping.

The consensus among dealers questioned is that demand for silver and gold bullion will make a comeback and premiums on eBay indicate the demand never left. Thomas and Heller both think that as soon as prices start to head convincingly higher, buyers will re-emerge. "The track record in U.S. is that people tend not to buy on lows but they wait as prices go up to buy," says Heller.

The biggest support for higher gold and silver prices is an apparent lack of selling. "Certainly there is hoarding going on," says Raymond Nessim CEO at MTB, "it is in anticipation of economic conditions in the U.S. especially."

EBay has noticed, however, that small sellers are growing faster than the business-sized seller. "Our research indicates that consumers can typically make more money if they sell their bullion on eBay vs. sell to a local coin shop" a noted by the high premiums. But the trend is towards buying and holding gold and silver, not towards dumping them.

For now, investors are waiting for some kind of dramatic price swing and follow through to jump back into the bullion market. When they do, silver will be their metal of choice and higher prices are sure to follow.


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-- Written by Alix Steel in New York.

>To contact the writer of this article, click here: Alix Steel.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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