Wednesday, January 30, 2008

How You Can Be an Arbitrageur

Two posts ago, I mentioned that the asset class that would likely perform well for the next several years would be physical resources. Not resource stocks, but physical resources, in your possession. This post will discuss how to go about doing that.

For the last 3 years, I have been bullish on Silver, and believe strongly in physical bullion ownership. Because global equity markets are falling into bear markets, I feel especially bullish on Silver for the long term. The safest way to participate in this great commodity bull market is by actually buying the metal, and there are several ways of doing this.

In my opinion, the best way to buy silver is in the form of silver coins minted in the 1960's. In Canada and the United States, most coins minted in this era were 80% silver bullion. I personally like purchasing pre-1968 Canadian Silver Dollars. Each one of these coins contains 0.6 ounces of fine silver, and is 80% pure.

Interestingly, any combination of pre-1968 of Canadian Silver coins that add up to 1 dollar will contain 0.6 ounces of silver. For example, 4 silver quarters has the same amount of silver as a silver dollar, or 10 silver dimes has the same amount of silver as a silver dollar.

The advantage with buying silver in this form is that it is divisible, portable, pure, and carries very little premium. This means that they will sell close to the spot price of silver. Other coins, such as Canadian Silver Maples, usually sell for spot plus 3-5%.

An alternative to buying silver coins is buying silver bars. This method is ideal if you wish to purchase large quantities of the grey metal. Generally, bars are denominated in 1, 10, and 100 troy ounces. I prefer to buy from either Engelhard, or JM.

In terms of buying gold, I think Canadian Maples, and bars from the above mentioned brands are a good bet. There are no Canadian Coins with gold content as mentioned above with silver. The Royal Canadian Mint has also minted Palladium and Platinum Maples, which are metals that are in equally strong bull markets.

In addition to precious metals doing well over the next 5-10 years, I feel that base metals, such as copper and nickel, also have a lot of potential. The best way to invest in copper and nickel is also through Canadian Coins.

Prior to 1982, all Canadian Nickels that were minted were pure nickel. With the price of nickel rising over the last several years, these nickels are now worth, in raw materials, close to 12 cents per coin.

Furthermore, most nickels minted after 1981 are 25% nickel and 75% copper. This makes their intrinsic value approximately 5.5 cents per coin. Nickels minted after the year 2000 are generally steel, and are worth far less than 5 cents per coin. For more exact figures, please refer to

I have taken a random sample of 2,000 Canadian nickels, and broken down the proportion of each type in the following pie chart:

In other words, if you were to go to any bank, and ask for $100 worth of nickels, you would receive approximately:

  • 500 Nickel Coins at roughly 12 cents each, which is $63.50 in pure nickel
  • 920 Copper Nickels at roughly 5.5 cents each, which has a melt value of about $51.50
  • 580 Steel Nickels, which can be turned back to bank for their face value of $29.00

After returning the worthless steel nickels to the bank, and getting back $29.00, you would be left with an expenditure of $71.00. However, you have, in exchange for the $71.00 spent, about $115 worth of commodities. This represents a risk free return of 62%.

What is also interesting, is that there are about 100 nickels in a pound, so 500 nickels would be 5 pounds of the commodity. This makes it easy to keep track of how many nickels you have just by weighing them.

Sorting nickels is made easier by using a strong magnet. The pure nickel coins, and the steel coins are both attracted to a magnet. The ones that are not are the copper nickels. From there, the steel and nickel coins must be sorted visually.

Now, you may be wondering if anybody would actually turn around and pay more than a nickel for a nickel. The answer is yes. My local coin store is willing to purchase my nickels, and you can also unload them on Ebay if need be. The seller in that auction was selling pennies, which is also profitable, and a good way to get into copper.

At the end of the day, I believe that holding physical platinum, gold, silver, palladium, copper, and nickel in your portfolio is the safest and potentially the most profitable way to participate in this great bull market.


GI said...

I'll say from the outset that I've been there done that and I'm not very happy with the result. First of all with bullion you get shafted by a large buy/sell spread which means you don't profit from the full price move. Second with respect to coins, I believe that they are taxed on purchase in Canada so shafted again. Thats not to say anything about the possibility of fakes which do exist. Thirdly if you are dealing with a bigger bullion quantity, in my case I'm looking at 1000 oz or more, the weight becomes a serious issue if you wish to trade often. Fourthly there is a liquidity issue. If I wish to sell bullion I have to haul it off to the dealer. By the time I get there the price could have changed significantly. Silver in particular has a tendency to move in sudden short lived rapid spikes when the price can change dramatically in a short period of time. Most of these issues can be avoided by investing in an ETF like SLV that you can buy/sell through a brokerage account at a moments notice from the convenience of your computer at home.

Owning the physical may make sense if you are part of the doomsday crowd that believes the coming monetary crisis will involve bank failures and total economic collapse. Personally I'm expecting something much more along the lines of the 70's stagflation that involved a crisis in confidence but where the value of building survival bunkers was vastly overestimated. :-)

Danny Merkel said...


1) buy/sell spreads exist with every sort of transaction. It does not matter if it currency, stocks, or bullion. I already mentioned that Canadian Silver Coins from the 1960s have very little spread.

2) I do not understand the point about not profiting when the price moves. That certainly has not been the case with me.

3)Canadian Bullion coins are not taxed. Neither are bars.

4)The odds of receiving a counterfeit 1960s silver coin is non existent. Who would produce fake quarters or dollar coins? Fake bars are in theory in possible, but not anymore likely than fake paper money.

5)If you need to invest large amounts of money, perhaps gold or platinum would be more appropriate.

6)For the price moving a great deal between the time you decide to sell and the time you get the coin dealer is absurd. We are not talking about day trading here.

7)The Silver ETF is an okay alternative, but that ETF uses futures as part of its investment strategy, so you could be investing in paper promises, and not real money.

GI said...

1/ I've paid spreads as high as 6% on 100 oz bars and I didn't mention bar charges and Brink's shipping charges.
3/ According to the Bank of Nova Scotia website "Provincial sales tax is applicable in certain provinces on coin & bullion sales." They certainly taxed me for coins here in Ontario.
4/There are many stories of people being duped by fakes on the Goldismoney forum. Apparently the Chinese make a big business out of producing fake coins.
6/In May 2006 silver jumped by about 5% in one hour. That kind of move is not unusual near a top when I would want to sell. It's not day trading but it is buying the dips and selling the tops every 1 or 2 years.

Got A Watch said...

Hi! Interesting post. Good strategy for long-term hold.

I have found the best way to speculate short term in precious gold, silver and platinum is at Royal Bank Action Direct.

They sell 'certificates' at the spot price from N.Y. which they claim are metals held in their vault. To me, I don't care if they have the metal or not, I will only lose my money if the Royal fails, which I consider unlikely. This is trading money, I am willing to accept some element of risk.

They charge no storage or any administration fees. Their commission is very low, to buy/sell 10,000 oz of silver costs me $225.00 CDN. They also have a new option now where you can choose to hold it in US or CDN $. I choose US because I like the greater price swings. Minimum purchase is 5 oz/Gld,Plat or 100 oz/silver.

There are drawbacks. Order execution is cumbersome, they have to get a 'live' quote from the NY Metals Desk, it usually ends up about 0.20c under actual spot in my experience. You can only buy/sell between 8:20 AM - 12:30 PM EST Mon-Fri, they close 1 hour before NY does to settle up, as far as I know. Settlement is trade day + 2 days, or no waiting with margin accounts.

It's a great low cost way to speculate. Has it quirks.

I just thought I would point this out. You probably knew about it, but I figured maybe some readers might be interested.

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