Recently I received a lot of offers from buyers, such as gold bars, silver bars, and other bullion. Price that they offered is quite low, some even ridiculously offered lower than gold/silver spot. We cannot blame them, because they might not have a clear understanding about the precious metal market in the world. Therefore, I decided to write this guide to give more information about why precious metal in the market are selling higher than spot price.
In the discussion, you will understand what's the difference between spot price and buying price, is premium of gold/silver price always bad?, etc.
First of all, A confusing part of owning gold, or silver, is the premium physical holders pay over spot. Before we answer let me say the cost to own physical metal is well worth it. I expect the spread between spot and physical metal will grow as demand increases and supplies decrease. Today we answer why physical gold carries a premium over spot prices.
Part of the premium, of course is a result of the refining, minting, administration and distribution fees for the actual manufacture of the coin. When you go to the gas station to fill up, you are not paying the spot price for a barrel of oil at the pump. There are many costs involved in the refining and distribution of fuel. We just expect that as a fact of life. It is the same for precious metal coins.
When the spot price of silver dropped considerably last year, the high premiums we were paying at the time reflected what was considered as a natural correction of what a more realistic price of silver should be based on supply and demand. The low price seems farcical as many people wanted to buy silver at that price, but there was low supply and long waiting times. Suppliers were charging 40% premiums. So if an economic event occurs that will spike the demand for an American Silver Eagle/GOld, and the mint has only regular reserves available, the high demand and low supply will push the premium higher.
A ‘coin premium’ is the additional cost of a bullion coin above and beyond the market value of the precious metal commodity it contains. For example, with gold at a spot price of $1600 , an investor can expect to pay a premium of $40-200 over the gold price to buy the one-ounce Gold coin/ Gold bar. Bear in mind that, coin premium will always higher than bar, because it has numismatic value (value that may appreciate in future or demand is high) while bar does not.
In general, this additional cost over the spot price for any bullion coin/bar stems from a number of factors, including the manufacturing, distribution, and administration costs incurred by the mint or refiner in making the coin, plus a “mark-up” representing the cost of sale and the profit for the wholesaler selling the coin to a retail dealer. The retail dealer, in turn, will also “mark-up” its wholesale price of the coin to cover its own sales costs and realize a small profit when selling the coin into the investor market.
This series of incremental price increases applied to the coin as it passes through the distribution chain is a typical market mechanism present in virtually every other industry in existence, from food to auto parts, and houseplants to sporting goods.
And, just as market forces of supply and demand largely determine the value at which all goods and services can be sold in their respective markets, the level of a given coin’s availability (supply) versus its popularity (demand) also directly influences the prices at which different coins will sell for in the market place, even though they may contain the same amount of the same metal!
In fact, in some unusual market conditions, the available supply of a given coin, when balanced against its market demand at any given time, can have a pronounced impact on the coin’s premium. Unusual demand for a specific coin type can drive its premium level significantly higher than that of very similar coins in certain circumstances.
And as always, it is best to seek the advice of a reputable and trusted bullion dealer concerning any aspect of precious metals investing.