Silver Coin Value and Beliefs
To a lot of people, the value of a silver coin is almost always a matter of calling up a coin dealer or searching The Official Red Book online. But what really determines a silver coin's value? Ultimately, it's only worth what someone will pay for it. Until the coin is actually purchased its value is really only a matter of belief. This article discusses the extraordinary part that belief plays in the pricing of any numismatic or silver bullion coin.
A silver coin may be priced based on its numismatic (collectible) value or its silver bullion value. The numismatic price of a coin will always be at least as high as its silver bullion value. For a coin priced mostly based on its numismatic value, a silver coin investor will be found to have the following beliefs:
Belief #1: There will be a motivated buyer when it is time to sell.
The liquidity of the numismatic coin market is thin. In other words at any point in time there are only so many coin collectors that are willing and able to purchase a particular coin. Coin collectors have a tendency to miss this point. I know as I used to be one. Look at it this way, there are many coin collectors out there. But how many of them need or want your 1916-D Mercury Dime at the time you need to sell it for $500? How many of them need or want your Mercury Dime collection at the time you want to sell it for $2000? The answer is... it all depends. But during the time you were collecting your Mercury Dimes you definitely believed that someone would purchase them when it came time to sell.
Here's a valid scenario: The economy has a down turn. You find yourself in a bind. You decide to sell some coins in order to get by. However, at this time there are certainly many other fellow coin collectors that are also in a bind. In this case supply and demand dynamics are really against you. There are more coin collectors selling and less buying. The possibility that no one will buy your coins from you is much higher. Again, you didn't believe that this was going to happen when you were collecting your Mercury Head dimes.
Belief #2: You will actually get the price listed in The Official Red Book.
The Red Book value is theoretically the average dealer selling price. This price is called the "book" value. However, the dealer has to make money. So, the dealer will often offer less than book value. My experience is that the dealer will buy your coins below book value and sell you those same coins back to you above book value. Which is fair as they provide a service. You may also sell your coins yourself. Ebay and CraigsList come to mind for this. But then you may be selling to dealers at these places anyway, LOL. Additionally, if any grading certification is required that is also coming out of your pocket. Once again... at the time you acquire your coins you believe you can get the book value of the coins. This happens less than you might think.
Belief #3: The dealer (or seller) is telling the truth.
Sales techniques in the rare coin market and in fact all markets today are getting more and sophisticated. The principle is always the same, convince the customer he’s getting the inside information from an expert to whom special insight and opportunities are available. The customer gets a great story. The customer also gets something pretty to look at. But in the end the customer doesn't know they are in the red unless they try to sell.
Silver coins that are bought for their bullion value rather than their collectible value have their own set of beliefs which help to set price. Silver bullion enthusiasts have more of a global market to work with. Coin collectors tend to be focused within a particular country. For a coin which is priced mostly based on its silver bullion, its value is largely determined by these beliefs:
- Belief #1: Silver price trends
- Belief #2: Analyst's opinions
- Belief #3: Related headlines
- Belief #4: Currency fluctuations
Belief in Silver Price Trends
People believe so strongly in trends that trend trading has become the norm. Hedge funds spend time and money developing their own proprietary trend trading algorithms. High frequency trading is all based on trend algorithms. Some estimate that over 70% of the trading that goes on in the silver futures market is based solely on these trend trading algorithms. Yet, according to some, technical analysis (the basis of trend algorithms) is at most only effective 60% of the time.
It's easy to understand why we believe in trends. Just look at any historical chart of silver prices. How many times have we thought something similar to, "If only I could have bought silver in 2001 and sold it in 2011." The trend is clear to see in the past. We believe that there is another trend possible in the future.
Do a book search on Amazon.com for "trend trading." You will see well over 100 books on the topic. That's not including all of the other books that base their investing methods on trends. We buy and use these books because we believe they will help us predict future trends so that we can profit from them.
John Maynard Keynes once said, "The market can stay irrational longer than you can stay solvent." Why? Irrational belief in the sustainability of trends!
Belief in Analysts
If you have been following the silver market for a while you are familiar with belief in analysts. How many times have you heard a forecast by Goldman Sachs or JP Morgan and then saw how the market reacted? Were the fundamentals of silver different before and after the forecast? No. Then why the significant change in the price of silver? Belief in the analyst...
I'm as guilty as the next guy. Sometimes people are just too busy (or too lazy) to do their own research. So when a silver "guru" calls for $60 silver in 2011 the first impulse is to buy. We usually believe that the guru has done his research. Therefore we often believe that the guru is right. As it turns out, gurus don't even believe their own predictions. That's why you always hear things like, "Silver is going up by the end of the year UNLESS... blah blah...
Beliefs play a large role in the price of silver. In fact, today, they play a large role in the price of anything. The entire financial system, with all of its derivatives, is belief on top of belief. I'm not talking about religious beliefs here. I'm talking about belief in the value or price of stocks, bonds, derivatives, the banking system and even the dollar itself.
Dr. Alexander Elder has very astutely defined price as, "A momentary consensus of value among the crowd of market participants." In my opinion, price could be more closely defined as: "An aggregation of beliefs resulting in the momentary consensus of value among the crowd of market participants."
Belief in News Headlines
Headlines can affect silver's price because of the belief that the headline will somehow affect silver. How about this one, "China's decrease in GDP growth indicates it will have a hard landing?" If people believe that China will in fact have a "hard landing" then it is not to much of a stretch to believe that they and other countries doing business with China will tend to purchase much less silver moving forward. It would be natural to then believe that silver coin value would decline because of a decrease in demand. One belief causes another belief and ultimately a chain of beliefs is created. If people believe this chain strongly enough they buy or sell silver accordingly - helping to cause what they believed to be true.
Belief in Currency
Inflation and deflation play a part in the value of silver. As we all know, since the Federal Reserve was established, the traditional tendency of the dollar is toward devaluation - better known as inflation. There is always the risk of deflation as well. So we find ourselves believing that a currency is a valid measure of value. A much more interesting belief is the belief that currency (a piece of paper or number in a computer) has any value at all.
In the U.S. and most other places in the world, we are in the odd position of trying to assign and communicate silver coin value using a variable value currency. Its a nice trick. It's like trying build to a cabinet with a variable tape measure. It causes problems.
Belief in Silver Coin Value
Beliefs play a large role in determining silver coin value. The entire financial system, with all of its derivatives, is belief on top of belief. Even modern day currency, the yard stick with which everything on planet earth is measured, is only as valuable as people believe in it. Belief plays a big role in the pricing of silver and silver coins. Keep that in mind when buying and selling physical silver and silver related securities. Don't be surprised at the volatility of the price of silver. Just remember that silver and silver coins have value outside of any financial beliefs.