Bank of Spain Sold Silver Below Market: An Arbitrage Chronicle

Did the Bank of Spain give away 4-peseta duros?

When silver trades at 23.15 euros per ounce, a 12-euro coin with 16.65 grams of fine silver is worth 12.39 euros. Yet, the Bank of Spain exchanged them at par. The difference was small but real, and for those who understood precious metals, it represented a risk-free operation: buy at 12, sell at 12.39, or more if the spot price rose. It was not a massive bargain, but a rarity in investment markets.

The mechanics of the exchange

The 12-euro silver coins (known as “karlillos” among enthusiasts) were not sold: they were exchanged. Legally, there was no VAT, and the Bank of Spain was obligated to accept them as a means of payment. Any bank branch could hand them over at the bill exchange. Those who bought them for 12 euros obtained an asset whose silver content was already around 12.4 euros. And if silver rose, the capital gain was direct. They called it “4-peseta duros” because the saying goes that no one gives anything away, but here the regulator was indeed doing so, albeit by oversight or inherited monetary policy.

Depletion and reappearance

Bank of Spain branches in Madrid and Seville ran out of stock almost immediately. But, surprisingly, weeks later, they had them again. The conspiracy theory: they didn't want to let them go, or they were withdrawing them to melt and mint new 20-euro coins with the same amount of silver — which represented an 8-euro saving per coin for the BdE. Meanwhile, those who had hoarded them began selling them on the secondary market at 13.25 euros, with 10% gains without lifting a finger.

The price of silver kept rising: from 12.39 to 12.73, then to 13.63, reaching 13.70 euros per coin. At that point, the return for those who bought at 12 neared 14%. Not bad for an operation that a central bank put on a platter.

The secondary market and skeptics

A market among individuals soon appeared. Lots of 50, 100, and even 200 coins were sold. One seller offered 200 units at 13 euros each. But not everyone saw it clearly. Critics pointed out that silver doesn't eat, takes up space, and if the price drops, you're left with coins worth 12 euros. They also questioned real liquidity: who buys 200 coins at the spot price? Some investors replied that they had already sold hundreds of coins at 13-14 euros, and that the true safe-haven value was in physical silver, not paper money.

Meanwhile, the Bank of Spain continued issuing new series: in 2010, 12-euro coins; in 2011, 20-euro coins; in 2012, 30-euro coins. All with the same silver weight (16.65 grams), but with an increasing face value. For those buying at 12, it was a bargain; for those buying at 20, not so much, as they paid more for the same silver.

Lessons from an anomaly

The story of the 12-euro coins is a textbook case of regulatory arbitrage. A central bank that, by inertia or design, sold silver below its market price for months. Those who understood it in time made money. Those who called it a bubble stayed out. In the end, silver kept rising, and those who bought at 12 euros saw their investment revalue without the risk of falling below the face value. The Bank of Spain, for its part, probably learned the lesson: 20-euro coins no longer had the same margin. But the damage — or the opportunity — was already done.

The curious thing about the matter: no one gives 4-peseta duros, but sometimes central banks do it unintentionally. And in this case, those who laughed were those who had been saying it for a month.

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