This is one of the most common questions I get from our customers: "Why is my bullion price higher than the spot price?"
They are curious—sometimes confused—as to why there's is a varying spread between the cost of bullion and the spot price of gold and silver that appears on price charts.
I understand their concern. If I didn't know a lot about the precious metals industry, I would think I'm being ripped off! But it's usually not the case.
So here's a short answer. You should view the spot price of bullion as the price of raw material. Likewise, the bullion price is the price of a finished good, which depends on many factors like the type, size, etc.
In this article, I'll cover the key factors that affect the bullion price so you understand where the premium comes from.
The type of bullion: sovereign coins, rounds (coins minted by a private mint), or bars.
Sovereign coins tend to have higher premiums than rounds or bars because they are issued by the government and are legal tender. They also resell for higher prices than rounds or bars. Conversely, rounds and bars have lower premiums but they resell with lower premiums.
I recommend that you read this in-depth guide that delves deeper into the differences between investing in coins, rounds, and bars.
The weight of the item purchased.
As with most products, the bigger the container, the smaller the premium.
Bullion is not an exception. A fractional gold coin (1/10, 1/4, or 1/2 oz), a coin weighing one or more ounces, a kg bar, or a 100 to 1,000 oz bar, all come with different premiums. The smaller the denomination, the higher the fabrication/minting cost as a percentage above spot.
It can go from 0.5% on the largest bars to more than 15–20% on the smallest fractional coins and CombiBars (50 gram bars divisible in 1 gram increments).
The size of the order.
Your bullion price also includes transportation, transaction fees, and operating costs.
Depending on the product purchased and the size of the order, these costs can translate into total markup over spot from as low as 1% to as high as 20% or 25% when markets are tight for small orders of fractional coins.
Fabrication cost alone can range from 0.5% for the largest bars to 15% or more for fractional gold coins and for silver coins (the lower the value of the coin, the higher the minting cost as a percentage of the coin's value.)
The good news is that many of these coins may sell for more than spot.
Operating costs usually vary between 0.5% for large orders of bars to a maximum of 3% on small orders of fractional coins or silver coins.
Fractional and 1 oz sovereign coins can often sell at spot or even above spot.
Pay attention to the spread between buy and sell prices. Rounds and bars have lower markup, but generally sell for less than equivalent sovereign coins.
Large bars have lower markup but are not suitable for most retail investors.
The larger bars are best suited for institutional or commercial buyers (jewelers and other manufacturers). Most investors should stick to smaller bars that are fixed weight retail bars (up to 1 kg) because they are standardized products that usually do not require assaying.
Be wary of dealers that advertise bullion "at" or "close to" spot prices.
They would be losing money if they did that. It is almost certainly a bait and switch strategy to get you to call them.
When you are on the phone, the sales person will try to sell you expensive "semi- or modern collectible coins" or "minted" coins—these can carry markups of 20–50% above spot prices and are not investment grade products.
In most cases, their resale value will be much lower than that of a standard sovereign coin even though they were sold at a premium.
The Hard Assets Alliance sells only bullion grade coins and bars
Our margins are low, and we get bids from the most competitive wholesalers and mints. There are no gimmicks or bait and switch tactics—just an everyday low price. Our pricing is transparent, and you have direct access to the most liquid and competitive precious metals market in the world.
Please feel free to ask me any questions you may have about precious metals or about our services.
Olivier Garret, CEO
Hard Assets Alliance
The free ebook, Investing in Precious Metals 101, tells you everything you need to know: which type of gold to buy and which to stay away from… how to avoid common mistakes… the best storage options… why you should insist on allocated gold accounts… and more.
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