Investing in silver and gold exposes individuals to a lot of terminology they are not likely to be familiar with. If you’re new to the realm of silver and gold investments, pricing is probably one of those sources of headaches. Among the terms you’re likely to hear on a regular basis is “spot price.” This, compared to other pricing and value terms, seems to create a lot of confusion for investors. As such, in this blog post we’re going to take some time to look at how spot prices work for precious metals.
Spot Prices Defined
The term “spot price” is accurately defined by Investopedia as “the current price in the marketplace at which a given asset such as a security, commodity, or currency can be bought or sold for immediate delivery.” That final part of the definition is particularly important because it focuses on the emphasis in precious metals that spot prices are specific to both time and place. The spot price you see for a particular gold or silver product applies to something that is available for delivery right now.
There is one important caveat to keep in mind here though. The spot price is a market indicator that reflects the price paid for a precious metal (silver, gold, platinum, etc.) based upon its immediate delivery, and is the theoretical value of that metal before it is converted into a bar, coin or round.
How are Spot Prices Determined?
Originally, spot prices were determined by the London Gold and Silver fixings. Starting in 1897 for the silver market and 1919 for gold, a group of “market participants” consisting mostly of banks would convene once or twice a day. Silver meetings took place once a day and gold twice. The group would start by looking at the current spot price and see if there was a change in the volume of buyers and sellers.
If there were more buyers, the spot price was raised. If there were more sellers, the spot price was lowered. This was a simple model that is still followed today, though it is used more to gauge the value for the price on silver and gold on a once-or-twice daily basis. Most silver today is actually bought or sold based upon the up-to-the-minute spot price.
Additionally, spot prices are determined by the future contracts (by month) with the most volume. This might be the current month, or it could be two months or more in the future. The spot price now is often pinned to that futures contract month with the highest volume of because that is often when the major participants will do business, trading physical silver and gold.
What Changes Spot Prices?
There are a variety of factors that can impact the spot price of silver and gold. For example, gold prices tend to go through periods of little movement, followed by periods of intense movement and extreme volatility. Economic data from the federal government and foreign governments, geopolitical news, and world events can all have an impact on the price of gold and silver. In fact, you need look no further than the recent Brexit event to see how geopolitical events can impact the spot prices of gold and silver. Our initial Brexit blog and follow-up one-month analysis of Brexit’s impact on precious metals clearly outlined what this geopolitical event did to the market.
Of course, the basic principles of economics still apply to spot prices. The supply and demand of gold, silver, and other commodities can send spot prices soaring higher or hold them back and inflict shrinking prices. At the end of the day, it’s important to remember that spot prices boil down to a simple number that refers specifically to the price at which you could purchase AND take delivery on silver and gold right now, not at a later date in the future.
Can You Buy at Spot Prices?
The vast majority of today’s silver is sold with a premium above the spot price. This is directly linked to the fact that the spot price refers directly to precious metals that have not been altered or refined. When it comes to collectible or proof coins, bars, and rounds, there is production value added and the need for a profit to be earned in support of that production.
For example, you can’t buy an American Silver Eagle from JM Bullion at spot price because the United States Mint first secure the silver, refined the product into coins, and sold it to authorized dealers. These coins come with a premium above the spot price to support all of that work in between silver leaving the ground and ending in coin or bar form.
Coins, both bullion and proof, from sovereign mints are so popular and often low in mintage figures that high premiums over the spot prices. The closest you’re likely to come to purchasing silver at spot price is to purchase bars and rounds because they have much lower premiums, with some even coming it at less than $1 over spot.
The primary method available today for purchasing silver near, at, or even below spot price is to purchase pre-1965 silver. Many dealers provide pre-1965 silver in bags, consisting mostly of early to mid-20th century currency that is heavily worn.
If you’re looking for silver close to or at spot price, for example, we highly recommend shopping an authorized dealer such as JM Bullion that helps prevent the sale of counterfeits or bags with seriously damaged coins that reduce the actual weight of silver in your purchase to a significant extent.
