The Morgan Report Blog

Junk Silver or Junk Bonds?

By David Morgan

“Junk silver” and “junk bags” are terms that refer to $1000 in U.S. coinage—dimes, quarters, or half dollars minted 1964 or earlier; commonly known junk bags consist of 90% silver. Junk bags of silver dollars are sold separately and have always held a higher premium.

We are talking about coins that are only in fair condition and have no collectible value above the bullion value or the “melt value.” The word “junk” refers only to the value of the coins as bullion, and “junk” is not scrap silver.

When these coins were freshly minted they contained 0.7234 troy ounces of silver per dollar of face value. In practice, the recognized weight of fine silver is 0.715 troy ounces per coin, or 715 troy ounces per bag—a bit less than original, due to wear. Thus the market recognized junk bags as containing 715 ounces of silver if smelted to 0.999 purity. Less common as junk silver are Kennedy half dollars from 1965 to 1970, which contained 40% silver.

In days gone by, junk bags of Canadian dimes and quarters were in the marketplace, but in today’s world very few exist. The Canadian coins contained 80% silver (0.600 troy ounces per dollar of face value) until 1966. In 1967, they were minted in both 80% and 50% varieties. In 1968, they either contained 50% silver or none at all ((such as the Cupro-Nickel). Dollars and half dollars were minted in 80% silver until 1967.

Junk silver coins are still considered legal tender and at many times have carried very low premiums. Today, however, the premium on junk bags is about 20% or more. There have been higher premiums near the peak of the silver price in 1980 and also during Y2K, when silver bags were in high demand.

For those beginning to invest in the real silver market, U.S. silver coins are easily recognized. In addition to being easy to describe to someone who has never seen a 90% silver coin in their lifetime, coins provide convenient divisibility. In other words they can be traded in small amounts, while a silver bar of perhaps 100 troy ounces cannot be divided or used for small transactions.

Simply stated, junk silver is popular among survivalists, but today it might be added among financial survivalists! In the event of a currency collapse, it is speculated by many in the precious metals community that silver coins could provide a viable alternative to today’s currency (scrip), commonly perceived to be money.

So, that is a very brief summary of “junk” silver and it must be pointed out that there is no default risk associated with owning silver. The price does vary along with all other assets, so you might risk not being able to trade your silver for the same amount of currency used for the initial purchase.

Junk Bonds

Now let’s look at “junk bonds.” A junk bond is a high yield bond that is rated below investment grade at the time of purchase. Bonds can also become “junk” if the market determines that the issuer’s risk has increased. For a quick example, at one time General Motors bonds carried a very high rating with the risk of default being extremely low, but today does anyone think that GM is capable of paying back the bondholders? These junk bonds are called “Fallen Angels.” Generally, junk bonds have a higher risk of default or other adverse credit events, but typically pay higher yields than better quality bonds.

Risks in all bond investments, including “high” quality bonds

1. Inflation
2. Currency risk
3. Risk of Principal
4. Market Risk
5. Political Risk
6. Default Risk
7. Liquidity Risk

There are other risks but the point is made: bonds of any caliber have risk! In this day and age, nearly everyone is familiar with the fact that certain rating agencies described the risk of certain “assets” to be high grade at near zero risk. Today that is laughable but certainly no joke, as it has basically taken down the global markets to the present level, and the trust (confidence) in the system has been greatly damaged.

These days, we see many fleeing to government bonds, due to the perceived safety. However, it might be interesting to note the words of currency expert, the late Dr. Franz Pick, who said that government bonds are “certificates of guaranteed confiscation.”

We might ask if Franz Pick’s statement is true or false. Perhaps we can approach the question differently since the outstanding public debt is roughly $35,000 for everyone in the U.S. Simply ask yourself if you, your friends, and your neighbors are able to pony up the amount required on a per capita basis. If so, don’t worry be happy! But if roughly $140,000 per household is not in your petty cash drawer (or your neighbor’s) you might start to consider what really deserves to be called junk—bonds or silver.

Jimmy Rogers stated at the end of 2008, “I’m now selling long-term U.S. government bonds short. That’s the last bubble I can find in the U.S. I cannot imagine why anybody would give money to the U.S. government for 30 years for less than a 4% yield. I certainly wouldn’t. There are going to be gigantic amounts of bonds coming to the market, and inflation will be coming back.”  For the record Mr. Rogers is bullish the U.S. dollar currently on a bounce play, stating everyone else thinks it is going lower, so I am long. His long term view however is very similar to mine.

As the debt burden continues to increase, more and more people will see the light and realize that it is not the government responsible for paying off the bonds—it’s the people themselves. And where is that “money” coming from? Looks like many people are waking up to this fact and several others surrounding this debt crisis. Adding to the debt and raising the debt ceiling on an over indebted system spells trouble ahead and the precious metals are reacting accordingly.

David Morgan

Subscribe to The Morgan Report today!

Comments are closed.

The Morgan Report Blog