Lack of Silver Spurs Speculation
By: Robert Walker
January 8, 1967
New York Times

Except by taking a discount from the going rate, it is difficult for an individual to sell small quantities of silver bullion. But this difficulty is nothing when compared with trying to melt a pocketful of change into bullion on a kitchen stove.

For these and other reasons, attempting to hoard silver coins for fun and profit may turn out to be only fund. Contrary to recent popular speculation, it will be a lucky hoarder who makes a profit.

Authorities on the silver market last week advanced this view of the hoarding phenomenon, which at first was the result and later part of the cause of a three-year coin shortage.

Silver Coins Saved

Since the Treasury Department began more than a year ago to cut the silver content of half-dollars to 40 per cent and to issue quarters and dimes as nickel-and-copper sandwiches, it has been common to see consumers scratching through handfuls of change to separate the gold dimes and quarters from the new.

The cupro-nickel coins were spent; the silver ones tucked away.

While the Treasury's action had solved the coin shortage, a silver shortage continued to exist, market sources emphasized, and it was getting worse, even though Britain and Canada also had largely abandoned silver coinage. Industrial demand alone was far ahead of production.

The price– currently pegged at $1.293 an ounce by the Treasury– would inevitably rise.

But it was unlike to rise soon enough or high enough to justify the naive hopes of coin hoarders or the more sophisticated calculations of commodity speculators, who have pushed silver futures lately as high as $1.37 an ounce.

In Wall Street one day last week, there were rumors of an early break in the line the Treasury was holding, resulting in a rise to perhaps $1.50 an ounce.

This speculation, however, was dismissed as "totally unrealistic" by a senior executive of one major silver producer. Moreover, he termed "utterly ridiculous" what appeared to be a popular theory– that silver would go so high that dimes, quarters and half-dollars would be worth (melted down) more than their face value.

At the existing price, a silver dollar is worth its face value. At $1.38 an ounce, dimes, quarters and halves would encounter so many practical difficulties that the price would have to rise to about $1.25," he said.

"Apart from rare coins, the average person would mean that the silver price would have to get to about $1.75," he said.

"Otherwise, the money would probably grow faster in a 5 per cent savings account."

It was possible but highly unlikely , he added, that the metal would so catch the fancy of speculators that a self-perpetuating landslide of buying would bring precisely the result the buyers sought– immediately higher prices.

In common with other authorities, he forecast a moderate price rise– to about $1.40 an ounce– early in 1968. By that time, it was estimated, that Treasury's stocks would finally be so low that it would be unable to do as it had been doing for three years– selling silver to all buyers at $1.293 an ounce, thus making it pointless for a consumer to pay more elsewhere.

Estimate Dispute

A spokesman for the Treasury disputed even this estimate of how soon the price line would break. With certain developments, the Treasury silver stocks could be stretched– and prices held down– for six or seven years, he said.

The paradox of a stable, relatively low price for the metal amid an acute, worldwide shortage can be explained by two developments.

Silver today is mostly an industrial commodity. But the Treasury must continue to view it mostly as money.

The industrial use of silver has risen in the United States from 95 million ounces 10 years ago to 145 million ounces last year.

Coinage us 10 years ago was 52 million ounces. With the sudden introduction of the cupronickel program it plunged last year to about 35 million ounces.

Even so, this amounted to total consumption of about 180 million ounces, compared with production last year of an estimated 42 million ounces.

Coinage and industrial consumption in the non-Communist world, moreover, was about 500 million ounces, while world production lagged behind at 250 million ounces.

Sluggish Response

Production responds so sluggishly to demand mainly because few deposits are mined primarily for silver. More than two-thirds of the world output is a by-product of lead, zinc and copper mining.

Thus, a major controlling factor is how much of these primary-target metals is being mined, as well as weather silver-rich or silver-poor grades are being worked.

In the classic, free-market situation, industry sources said, this imbalance undoubtedly would long ago have led to much higher prices.

But the Treasury holds the world's largest concentration of silver– nearly 600 million ounces– and it has an interest in price stability, mainly to avoid hoarding and, the resultant coin shortages. It particularly wants to avoid price levels where melting coins for bullion actually becomes attractive.

Demand for coins has grown with the vending-machine industry– change may lie out of circulation in a machine for weeks– and with the general growth of retail activity.

In addition, a Government official pointed out, the Administration has a more general interest in holding prices down to combat inflation in industry.

Demand has grown in a long list of industrial applications. The boom in photography, amateur and professional, has increased requirements of silver nitrate. As the best electrical conductor known, the metal is used for batteries, switches and controls in everything from appliances to spacecraft. Also silver alloys make the best, most reliable brazing materials.

With all its desire to keep prices down, the Treasury faces a dilemma. Of its current stock of nearly 600 million ounces, about 400 million ounces are not "free" silver. They are the backing for silver certificates, a form of paper currency, and cannot be sold.

Government officials and other authorities doubt that silver certificates in such an amount still exist. Many must have been burned, lost at sea and otherwise destroyed.

One authority on the subject suggested that the situation might lead to something like the following course of events:

>Congress would be asked soon after it met this month to set a deadline for the redemption of all outstanding silver certificates. It would be widely advertised that, after the deadline, the certificates would be worthless.

>Certificates would stream from half the safety-deposit boxes and mattresses in the United States, but the total probably would not exceed 250 million ounces.

>Thus the Treasury would retain, at the least, 350 million ounces of silver, all available from inflation-fighting.

That amount, the source estimated, would permit a defense of the price line at least until a year from now.