Scroll through the online catalog of JM Bullion or your favorite sovereign mint, and you’re bound to see a lot of different prices for gold, silver, and platinum bullion products. Whether you’re looking at coins, rounds, or bars, prices differ. The question left in the minds of many as they search for investment options is, “how do they come up with these prices?”
Rest assured, it is not an arbitrary number chosen out of thin air that is used to determine the cost of a gold coin or a silver bullion bar. There are a lot of factors that go into pricing each individual coin, bar, or series of products.
Spot and Future Prices
The first step in determining pricing comes from two critical benchmarks for all precious metals: spot prices and future prices. These figures are often divulged on television and radio, but the figures are unavailable to retail buyers of gold and silver bullion coins or bars. The spot and future prices of gold and silver are determined by so-called over-the-counter markets and future exchanges.
Over the Counter (OTC) Markets
Simply put, the OTC markets consist of traders dealing directly with other traders in one-on-one scenarios. Generally speaking, OTC deals consist of purchases of large 400 oz gold bars or 1000 oz silver bars, usually for the purposes of settlement in London. With that said, anyone buying a coin from a bullion dealer is also conducting an OTC deal. Prices in this situation are determined by the spot price on the market, but that does not mean that the products are sold at those prices.
Future Exchanges
Public, regulated exchanges have a price for delivery of gold or silver at various dates set in the future, with the largest of these being the US COMEX market. In many cases, the current or nearest future price of gold or silver is quoted as the spot price for physical reserves of the precious metal.
While spot prices and futures are related to one another, neither is solely responsible for the pricing that authorized dealers use to determine the cost of a coin or bar to an individual purchasing these precious metals. So, how do they come up with those prices?
Bullion Dealer’s Spot Pricing
Most authorized dealers will use five key factors in determining the bullion premium price that investors pay when purchasing coins such as the American Silver Eagle, American Gold Eagle, or Canadian Silver Maple Leaf, just to name a few. These factors include:
- Current bullion market supply and demand factors.
- Local, national, and global economic conditions.
- Volume of bullion offered or bid upon.
- Type of bullion products being sold.
- Bullion seller’s objectives.
Supply and demand alone often play a big role in the pricing of bullion products by individual authorized dealers. In order for dealers to maintain a viable business model they have to balance product inventory accordingly. When the inventory of bullion gets too high, you often see spot prices begin to rise, while low inventory of bullion results in unhappy customers around the globe.
As such, dealers usually lower their premiums when supply is high to capture more market share and unload their supply of gold or silver. However, lowering premiums on too many items creates a run on the precious metals market, which can quickly flip the conditions from a glut of gold and silver to low inventories that frustrate investors and collectors.
Form of Bullion in Question
Another major determining factor is the type of bullion being sold. Large volume bars often have lower premiums per ounce than smaller bars and coins. It costs money for any mint to product gold and silver products, but the cost of producing a singular 100 oz bar of silver is significantly lower than striking 100 individual 1 oz rounds of silver. The amount of silver offered is the same, but the time and cost involved is greater.
It is a matter of simple production. A cast bar of gold or silver is much easier for a mint or refinery to produce, which means the price for a dealer to purchase that bar is lower, and the eventual premium you pay is lower. When it comes to coins, they have the benefit of legal tender status, greater divisibility, rarity, and detailed designs, but as they are more complex to produce, the cost goes up, which means the dealer’s price goes up, as well.
The origin of the bullion also impacts the premium. Coins and bars produced by sovereign mints almost unanimously come with higher costs over the spot price. Private mints are able to produce rounds and bars with lower prices and sell them to authorized dealers, who are able to offer them to consumers at lower prices over spot.
Realities of Economics
At the end of the day, the price of bullion coins and bars from authorized dealers is a matter of simple economics. Operating a business as an authorized dealer, from the employees storing, packing and shipping the goods to those in the office running the software and online purchasing platforms are part of a network of paid individuals keeping the precious metals marketplace humming.
These companies operate on budgets and profitability. Because each and every authorized dealer has to purchase inventory from sovereign and private mints at a price over spot, there is an additional premium added to the cost to support that network that makes it possible for investors and collectors to purchase the coins, bars, and rounds that makeup their portfolio or collection.
In reality, all of the factors mentioned above are balanced in a delicate interplay to help set premium prices, which fluctuate with time depending on changes to one or more of the factors covered in this post.
