Bid-Ask Spread: What It Is And How It Works

Key takeaways:

The bid-ask spread is the amount of distance between the bid price and ask price of a product. The bid price is the highest price a buyer will pay, while the ask price is the lowest price a seller takes for their product. For real-time updates, you can check our gold price chart or our silver price chart, which displays the current bid and ask prices.

The spread itself serves as a measure of the product’s liquidity. The lower the amount of the spread, the easier it is for a buyer to find a seller and vice versa.

For precious metals, the bid-ask spread can guide you in knowing how easily you could buy or sell an ounce of gold or silver. Let’s talk more about that, along with some of the reasons behind the existence of the spread and how it moves.

What is the Bid Price?

The bid price is the highest amount that a precious metals dealer will agree to pay for your gold or silver. It is almost always a lower amount than the ask price.

Now, when we say “buyer,” we don’t mean you – the end user. Rather, it is what professional dealers will use as their base level price when they want to buy gold or silver from you.

What is the Ask Price?

The ask price is the lowest amount that a precious metals dealer will accept for a sale. It is either equal to or, in most cases, higher than the bid price.

The ask price is usually the price cited as the spot price on most publications. The price is made public because it is the foundational price for the dealers’ products.

What Bid-Ask Spread Tells You

As we have mentioned above, the bid-ask spread is an expression of the liquidity associated with trading gold, silver, or whatever precious metal you want to use. So, it might help you to decide if you want to buy or sell based upon how readily you want to be able to convert your gold et al to cash or from cash to gold.

As a rule of thumb, shorter-term investors prefer more liquidity, since they don’t want to hold their metals any longer than they have to hold them. Long-term investors don’t care as much, so long as they aren’t planning on making moves anytime soon.

The bid-ask spread also accounts for the risk that market makers, or big traders, take when they attempt to buy lower and sell higher. The amount of profit they can realize is inversely related to how easily they can make the deal.

How Bid and Ask Prices Are Determined

The bid and ask prices are, more or less, embodiments of supply and demand. When supply increases, ask prices tend to drop as sellers are willing to accept less money for their products.

On the other hand, if demand increases, the bid price increases due to buyers’ willingness to pay more for their metals. At the core of all of this are the market makers, who seek to balance their ease of trade with the profit they realize from the deals.

Practical Examples

The current bid price for gold is around $3,380/oz right now. So, if you have any gold to sell to a professional buyer, this price is likely the one you’ll receive for your products. You may be able to negotiate a slightly higher price, but the bid will serve as the anchor for the deal.

Were you to sell 10 ounces of gold, you’d receive around $33,800 for the deal.

At that point, the buyer would turn around and offer those 10 ounces using the ask price, plus the premium that the dealer attaches. Although the premium varies from product to product, let’s say it’s 2.5% over the ask/spot price. The average premium is 1-2% for gold bullion.

If the “ask price” sits at around $3,395, the baseline price for the 10 ounces would be $33,950. After the addition of the premium, those same 10 ounces would be available for $34798.75, resulting in an overall profit for the dealer of $998.75.

Additionally, premiums can differ between products; for example, silver coins may have different prices depending on market factors. For a more detailed explanation of how these prices are determined, see our guide on bullion price vs. spot price.

Factors Influencing the Bid-Ask Spread

Now, the bid-ask spread is not a consistent measure across all products. Even if we confine our examination to precious metals, the spread generated in the gold market is governed by quite different forces than the silver market.

For one thing, the trading volume and number of people wanting to trade gold is far higher than in silver. So, the bid-ask spread for gold is more likely to be smaller than the spread for silver, as it will simply be easier to buy and sell gold than silver.

The volatility of silver is also higher than gold – for much the same reason. So, products with higher price volatility tend to have wider spreads, as they are much riskier for traders to buy and sell – and fewer of them are willing to do so.

Final Thoughts

The bid-ask spread measures the distance between the price sellers are willing to accept and the price buyers are willing to pay. The spread serves as a shorthand for the product’s liquidity, or how easy it is to find buyers or sellers for it.

Keeping an eye on the bid-ask spread can help you decide whether to make an investment in gold, silver, or any other type of precious metal. It may not matter to you whether or not you can find a new buyer or seller, but as your situation changes, the spread might be a valuable measure to have.