$80/oz Silver: Does the Royal Canadian Mint Know Something We Don't?

Last year, the Royal Canadian Mint started selling commemorative coins stamped with a face value of $20 containing 1/4 oz of 99.99% fine silver to Canadian residents for a price of $20 per coin (limited 3 per household).  The RCM has since followed up with 2 releases of the same kind of coins with different designs.

With the latest release, the 2012 Polar Bear coin, they even advertised: "The last coin sold out in 34 days."  Canadian residents who order these coins are also prompted that the mint plans to allow them to subscribe to receive the next in the series of coins, indicating the mint has plans to release even more of these coins in the future.

First coin, second coin, third coin.

If you examine the coin it has a face value of $20 and 1/4 oz of silver.  The implicit melt value of the silver content in the coin is $80/oz.  The mint selling these coins to Canadian residents for $20 each essentially means besides inflation or a currency collapse, there is no other risk to purchase them.  An owner of one of these coins can simply walk into a Canadian bank and exchange it for $20 in Canadian currency (although it would be foolish for them to do so, in my opinion, given that they sell on ebay for $30-45 each).

My friend, E.S. made the claim that the mint is hedging against a significant spike in the price of silver, up to $80/oz.  My belief is with the speed at which these specific coins sell out, the mint realizes that there is the possibility that almost over night, the price of silver could run up to at least $50/oz.

With this latest release, let's assume the cost to the mint of just the silver in the coins was around $30 (the price range silver has been in the past 6 month).  With a mintage of 250,000 coins at 1/4 ounce per coin, that means the mint had to consume 62,500 oz of silver just for this release.  With $30/oz silver, that would mean just for the metal, the mint had to spend $1.875 million dollars.

At $20 per coin, the total sales from these coins is $5 million, with a profit of $3.125 million.  The profit alone would allow the mint to buy back the same amount of silver they expended on these coins up to a spot price of $50/oz.  Furthermore, if the price of silver went as high as $80/oz, the revenue collected from the sale of one release of these coins would almost be enough for the mint to break even.

The RCM mints a wide range of purely numismatic precious metal coins at price points whereby the melt value of the metal in the coin is far less than either the face value or the sell price of the coin.  Why would the mint then release a coin where the face value is equal to the sell price?  Most of the numismatic bullion products the mint sells tend not to sell very fast.  This 1/10th gold coin, for example has been on sale for at least 4 months and has still not sold out (as of mid February, 2012). 

Answering my question of why the mint would sell the $20 face value silver coins at face value, I believe it is because the mint is anticipating another rapid price spike in silver.  If the price spiked to $50, possible up to $80/oz, the mint will need the capital to be able to replenish it's inventory of silver.  I believe these coins are a means by which they are preparing for that event.

Remember, the Royal Canadian mint also produces the world famous Silver Maple Leaf bullion coin which being minted at an exponentially increasing rate.  With at least one release of the $20 commemorative coins, the mint will essentially secure the funding it needs to buy back at least 62,500 oz of silver at $80 to break even ($50 to stay profitable).

I honestly do not believe the mint would sit on a cash position from the sales of the $20 coins, but instead would buy back as much silver as possible at the current low market price.  For one release, assuming they bought 65,000 oz of silver at $30, the sale of these coins would allow them to buy just under 143,000 oz of silver at roughly $35/oz.  If the name of the game for them is to buy back more silver than they expended, they can and will keep releasing these coins until silver is at least $50/oz, possibly until it's up to $80/oz.

Does the RCM know something we don't know?  I believe so and I believe that is that silver prices are going much higher in the near future (otherwise they would not release these coins at all) and that when the price rises up to $50 or higher, it will be a very rapid ascent (otherwise they would not sell them at a price where they know they will sell out in about a month).

A closing note to think about.  Since the mint has to get the government's blessing to be able to issue any kind of coinage denominated in the Canadian currency, does that mean the Canadian government know too?