Buying Gold and Silver - Understanding the Spot Price, Premiums and Total Spread

We constantly receive questions about the intricacies of precious metals pricing. Whether you’re a seasoned investor or just dipping your toes into the market, understanding the intricacies of pricing is crucial. Terms like “spot price,” “premiums,” and “total spreads” can be confusing for newer investors. In this blog we will simplify and demystify these concepts and explore how they impact your investment decisions.

The Spot Price

Before real-time trading, people relied on the London fixed price for gold and silver. Now, we have the spot price - a live value for one ounce of pure precious metals (gold, silver, platinum, palladium, or rhodium). You’ll find spot prices on TV, financial websites, and mobile apps. Remember, there are two prices: the spot bid (what buyers are willing to pay) and the spot ask (what sellers expect).

Understanding Premiums

Why does buying gold or silver cost more than the spot price? That’s where the premium comes in. Premium is the difference between the spot price and the total price you pay. Along the supply chain from mint to distributor to retailer everyone earns a living from this premium. Shipping costs, profit margins, and metal type affect the final price you pay.

Selling and Discounts

When selling, you’ll encounter a discount below the spot bid price. Just as buying involves the spot ask plus a premium, selling means you’ll receive the spot bid minus a discount. Remember, understanding these factors ensures informed decisions when investing in precious metals. 

The Total Spread

When you buy and sell precious metals, consider the entire lifecycle. That gold bar or silver coin you hold has a story—from purchase to eventual sale. The critical number here is the total spread. It’s the difference between what you paid initially and what you receive when selling. Think of it as the lifetime cost of ownership.

Why Some Products Shine Brighter

Not all precious metal products are created equal. Some have better total spreads than others. Why? It’s a complex mix of production costs, efficiency, and market dynamics. Factors like where the product is manufactured and technological upgrades matter. 

Maximizing Returns

If your goal is to maximize returns, focus on minimizing your total spread. But remember, if you’re a collector or simply love the coins, premiums and spreads might matter less. Still, crunch the numbers 3% versus 5% over a lifetime can make a world of difference.

Silver vs. Gold

Why does silver’s premium percentage dwarf gold’s? It’s straightforward. Fixed costs drive production. Whether it’s a gold coin or a silver coin, the striking process and other expenses remain similar. Yet, silver’s higher premium reflects market realities.

Fixed Costs and Percentage Differences

When it comes to minting gold and silver coins, the fixed costs remain relatively similar. The striking process, the machinery, and the expertise required are comparable. However, there’s a crucial distinction: the value of gold versus silver. Gold is currently valued at about eighty times more than silver. This disparity affects the fixed cost as a percentage of the metal’s value.

Practical Example: Silver Maple Leaf vs. Silver Eagle

Let’s illustrate this with two popular coins: the one-ounce Silver Maple Leaf (produced by the Royal Canadian Mint) and the one-ounce Silver Eagle (produced by the US Mint). We’ll use an example spot ask price of eighteen US dollars for silver.

1. Silver Maple Leaf (Cost: $21):

o You buy one Silver Maple Leaf for $21 (spot plus a $3 premium).

o But what about selling it back? Dealers typically pay the spot bid price, which in this case, we’ll assume is $18. So your total spread is $21 - $18 = $3.

2. Silver Eagle (Cost: $22):

o You purchase a one-ounce Silver Eagle for $22.

o When selling, dealers are paying $19.50 (spot bid). Your total spread here is $22 - $19.50 = $2.50.

Now, here’s the key: While the Silver Maple Leaf had a lower initial cost, the Silver Eagle offers a better sell-back price. So, even though you saved a dollar upfront, the narrower total spread makes the Silver Eagle the smarter choice for long-term investment.

Remember, you’re not bound to sell back to the same dealer. Shop around! Some companies offer lower premiums to attract buyers but may not have the best buyback prices. Look for a balance opt for a dealer with competitive premiums and favorable buyback terms.

Scrap Metal: Proceed with Caution

Lastly, a word of caution: Avoid buying impure or questionable scrap metal. While it may seem tempting to acquire it at or slightly below spot price, remember that scrap metal requires refining. When you sell it, expect a lower price than the spot bid. Scrap metal is like a rough gem—it needs polishing to shine. Stick to reputable products with transparent pricing. 

Graded Coins: A Double-Edged Sword

Graded coins, despite their allure, can be tricky. Yes, they often command high premiums upfront. But when it’s time to sell, the total spread widens. Educate yourself thoroughly before diving into graded coins. Know the market, understand the grading system, and consider the long-term implications.

Generic or Discounted Rounds: A Balancing Act

Generic rounds, available during blowout sales, might seem like a steal. But tread carefully. While they’re cheap upfront, their global reputation matters. Will buyers readily accept them down the road? Consider the total spread—the difference between what you paid and what you’ll receive upon liquidation.

The Takeaway

Spot prices, premiums, and spreads—these terms may sound overwhelming, but armed with the right knowledge, you’re well-equipped. Remember the formulas we’ve shared. And if you have questions, reach out to us at info@swpcayman.com 

Happy investing and may your precious metals journey be prosperous! 🌟

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