What is Premium Over Spot?

When investors talk about the spot price of precious metals, they are referring to the current market price of that metal for immediate delivery. Technically, the spot price is separate from futures prices, which are contracts set for delivery at a future date. While futures prices can influence spot prices, the spot price reflects the price at which metals are bought and sold for immediate delivery in the marketplace.

Multiple factors combine to determine this price. Like most activities, precious metals have their own terminology. Two of the most common terms you’ll encounter when dealing in precious metals are the spot price and the premium.

Both terms are critical to buying and selling gold, silver, and other precious metals. In essence, the spot price represents the current market price of precious metals, and premiums vary according to this baseline figure.

So, if you are new to precious metals investing or simply need a refresher, you’ve come to the right place. Let’s discuss the spot price, premium over spot, and how the relationship between the two should be at the forefront of your mind, whether you are buying or selling.

Defining Spot Price

Precious metals are traded globally, their spot prices are an amalgam of various trading floors and marketplaces around the world.

The primary drivers of the spot price are supply and demand. As supply increases or demand decreases, the price goes down. Conversely, if supply decreases or demand increases, the price rises.

Political and geopolitical events can also have a significant impact on supply and demand. For example, a new discovery of gold or silver could flood the market with additional supply, driving prices down. On the other hand, a new government policy restricting platinum exports could increase prices globally.

Even elections and other significant political changes can move the needle. Futures traders’ perceptions and sentiments play a major role in influencing the price they are willing to pay for or accept when trading metals.

It’s important to note that the spot price is not static. It constantly fluctuates, particularly during trading hours. For most investors, it’s more useful to know the general range in which the spot price moves rather than focusing on a specific number at any given moment.

Compare the spot price of precious metals:

• Gold price
• Silver price
• Copper price
• Palladium price
• Platinum price

What is a Premium?

Now that we’re clear on what the spot price is, let’s talk about the premium over spot. Simply put, the premium is the amount added to the spot price when you are buying precious metals.

It is not possible to buy precious metals at their exact spot price because you are dealing with a physical item. Unlike stocks or bonds, precious metals are tangible assets, and various costs are involved in bringing them to market.

These costs include mining, refining, distribution, and retailing, and they are added to the spot price—along with a dealer’s profit margin—to determine the premium.

The important thing to remember is that premiums are not uniform. They can vary widely from one dealer to another, which is why it’s essential to shop around before making a purchase. However, you must know the current spot price first. The spot price is the baseline cost, and the premium is the additional amount charged above that.

What Contributes to the Premium?

Let’s dive deeper into the factors that contribute to premiums over spot. While paying a premium might seem frustrating, there are several legitimate reasons why premiums exist. Here are a few factors that affect the premium:

Manufacturing Costs

Precious metals must be extracted from the earth through mining, an industry with a long history. However, mining is anything but simple. It is a costly and labor-intensive process, requiring millions of dollars in equipment and personnel to recover metals like gold, silver, platinum, and palladium.

Once extracted, metals are still in their raw form—known as ore—which contains impurities. Refining is necessary to remove unwanted materials, leaving only the precious metal. Refining can be done through processes like melting the ore or using chemicals to separate the precious metals.

After refining, the metals may be minted into coins or shaped into bars or rounds. This process adds additional costs because investors and collectors expect a well-crafted product, not a lump of unprocessed metal.

Packaging and Distribution

Once the metals are refined and minted, additional costs arise from packaging and distribution. Precious metals require secure, protective packaging, which adds to the overall cost.

Shipping precious metals is another significant expense. Due to their value, metals are prime targets for theft, and they also need protection from fire or flood damage. To mitigate these risks, shipments are carefully insured, and layers of security are put in place. Additionally, larger orders often require signatures upon delivery, adding more logistical steps.

Retailer Margins

While there are benefits to buying from a local coin shop—such as seeing the metal in person and taking immediate possession—there are also additional costs. Brick-and-mortar retailers have overhead expenses like rent, utilities, physical security, and staff, which means they often sell metals at slightly higher premiums than online retailers.

Online dealers like JM Bullion can generally offer more competitive prices because we don’t have those same overhead costs. However, premiums still exist to cover the essential services we provide.

Supply and Demand

Premiums don’t exist in isolation. Market conditions, such as supply and demand, influence the premiums charged by dealers. In times of high supply and low demand, premiums tend to decrease as dealers try to entice buyers. Conversely, in times of low supply and high demand, dealers can charge higher premiums because buyers are willing to pay more.

Precious metals market conditions often reflect the overall economic climate. During periods of economic downturn or high inflation, investors tend to flock to precious metals as a safe haven, increasing demand and driving premiums higher.

While it’s rare to find precious metals sold at spot price, it’s important to remember that premiums are a normal part of the transaction. They reflect the cost of bringing metals from the mine to your hands.

Conclusion

Premiums over the spot price are a reality in the precious metals market. They cover the costs of mining, refining, minting, packaging, shipping, and distribution, as well as dealer margins. While it’s important to shop around for the best deals, be cautious of offers that seem too good to be true. If JM Bullion has a higher premium on a product, there’s a legitimate reason for it.

In any case, understanding the relationship between the spot price and premiums is key to making informed decisions when buying or selling precious metals.