When you buy and sell gold you will hear the words: “spot price” and “premiums” mentioned a lot. The price that a gold buyer pays for an ounce of bullion is made up of the spot price of gold and the premium. For instance, the final price of an American Eagle coin will be made up of the spot price plus 16% premium.
- By definition, the spot price of gold is the price of an ounce of gold exchanged on the commodities market.
- The bullion premium is the additional price that a gold bullion dealer will add to the spot price.
- Understanding the difference may help you navigate your way around the gold dealing industry.
- The bullion premium depends on a couple of factors:
The supply and demand factors that affects the bullion market
The supply and demand for gold is a major influence on the price of gold. A bullion dealer always has to balance product inventory and his profitability. If there is too much gold, there is a higher cost that goes into storage and security and marketing. If they have too little, then customers get angry. The fluctuation in the availability of bullion products in the market can affect the premiums. This is something that a lot of dealers have had to manage, especially with inventory running low because of the mine shutdowns implemented by governments in an effort to curb the spread of Covid-19. The price of gold rallied and this led more people buy gold with hopes that they would get a sizeable return when the price hits its highest point. In situations where the prices are incredibly volatile, dealers may mark up prices to prevent a complete sell-off of their inventory but they also are more willing to pay more for gold they buy from the public. So, right now we are in a situation where buying or selling gold is a good idea until we see some drastic changes in the near future.
Local And International Economic Conditions
Significant market events can influence bullion premiums on at a local level. For instance, in a small town that only has one physical gold buying business; the gold bullion dealer may increase premiums to try not to run out of inventory. In countries like Venezuela where the local currency has lost so much value it has been rendered useless, the locals may decide to buy gold bullion to preserve what’s left of their wealth. This means, dealers will jack up premiums.
When a major event happens that affects the global economy like the Financial crisis of 2008, and more recently, the global coronavirus pandemic, you can expect premiums to go up just and expect gold dealers scrambling to buy whatever gold they can get their hands on.
The volume of bullion that is being offered
Every gold dealers incurs costs on every transaction. He has to factor how much time a transaction takes, overhead costs as well as processing costs. A single transaction for an ounce of gold may have the same transaction cost as a 1 kilo gold bar. The cost of large volumes of gold bullion are spread out which means the transaction cost for smaller volumes may cause premiums to go high.
The kind of bullion products being sold
As a rule, it costs more to produce large pieces of gold. It also costs more to make gold bullion coins because of their intricate designs. This translates to higher premiums. There are also differences between government mints and private mints. For instance, the U.S Mint charges at least 3% over the spot for each Gold Eagles they sell to dealers. Private companies may sell bullion in bulk for less than half what government mints charge.
Dealers have to find a balance or a “sweet spot” where the time to sell is reduced to increase the seller’s profit. This can be difficult because there are so many factors that can affect the premium and the spot price.
