The 70:30 ratios
So what is the best way to structure the silver portion of the bullion portfolio? The answer to this question depends on several factors. For example, do you wish to make a one-off substantial purchase? Do you wish to make a substantial purchase initially and then add to your position regularly? Perhaps you want to enter cautiously and simply make a periodic purchase to take advantage of average costing over a long period?
Whatever your strategy, my recommendation is based on the 70:30 principle of demand, recognisability and diversification. This is not a mainstream economic principle per se but an approach built on my experience of the local silver market over the past 10 years. In short, I believe that a balanced silver bullion portfolio should be structured as follows: 70% composed of the big five silver bullion coins (the American Eagle, Canadian Maple, South African Krugerrand, Australian Kangaroo and British Britannia) and 30% of other coins, bars and rounds of various sizes minted by internationally recognized and trusted mints and refineries.
The importance of the 70%
My product range business model is not rooted in identifying and then subsequently pushing and marketing a particular silver bullion product. Rather, I import trusted silver bullion products that are in high demand both nationally and internationally. Eagle and Maple coins are by far the most favoured bullion coins in the world measured by demand – nothing comes close to these in terms of numbers sold each year. For example, the US Mint produced and sold over 45 million Silver Eagle in 2015, and the Royal Canadian Mint sold over 30 million Silver Maples over the same period. However, the silver Krugerrand has changed the local structure of the silver bullion market in South Africa. In fact, over the past year, the silver Krugerrand has overtaken the Eagle and Maple in terms of coins sold. How is that for proudly South African! This is why I propose to clients that they commit at least 70% of their silver bullion portfolio to these three silver coins, perhaps with the largest portion devoted to the silver Krugerrand. Having observed the distribution of bullion coins for many years, I have seen the silver Krugerrand become extremely popular not only locally but also internationally. The Krugerrand is one of the most trusted brands in the world of bullion investing and should thus earn the number one spot in the 70% portion of your portfolio.
My chief motivation for the 70:30 ratio is based on the hypothesis that it is easier and quicker to find buyers for these five coins than for other less-favoured coins or other semi-numismatic bullion coins such as the Australian Silver Kookaburra or the Chinese Silver Panda. I am in no way saying that you should abandon other types of bullion coins; both the Kookaburra and the Panda have gained a rather healthy collectable premium on earlier releases. I am simply suggesting that, first of all, the bulk of your portfolio should hold one or all of the big five silver products that are in highest demand. Secondly, should you decide to resell your silver back to me, your product would have a ratio that is similar to my sales-demand ratio. For example, if a client were to offer to sell back a monster box of 500 silver Krugerrand, I would almost certainly take it right away. I sell numerous monster boxes regularly, so I have to replenish my stock back. If you offered 500 Chinese Pandas, it is likely that I would only take 50 to 100 at the time since I sell hundreds of times more Krugerrand. So, as an investor, ensure you devote the largest portion of your portfolio to the most trusted and liquid products.
Article courtesy of Going for Gold: A guide for the South African precious metal investor by Zoltan Erdey
