Why Is The Bullion Price Higher Than The Spot Price?

When it comes to how gold and silver bullion products are priced, there seems to be a lot of confusion out there. Potential buyers often ask, why can’t I buy gold or silver at the spot price?

To address this question, let’s first review what exactly the spot price is. Spot gold and spot silver prices are derived from trading in the most active front month futures contract. For example, in the month of July, the September silver futures contract has the most activity of the front months, and therefore the spot silver price is derived from this futures contract.

The “spot” price simply refers to the price at which the metal or commodity may be transacted and delivered upon right now. This is in contrast to the futures contracts which denote a price for a future delivery date. The spot price does not, however, account for any other costs associated with the purchase or sale of the metals.

The Bullion Supply Chain

Bullion bars and coins follow a chain of supply just like many other products. First, the bars or coins are manufactured by a government or private mint or producer. These mints or producers will then sell their products to bullion dealers. Only specific bullion dealers that have adequate capital and business may buy directly from certain mints such as the U.S. Mint. If a dealer does not meet the specific requirements, then they will have to purchase from a dealer that does. This can add an extra layer, or middle-man to the process. More about that later in this guide.

Dealer Markups

Dealers are not in business to work for free. A dealer aims to purchase the product at a certain price, mark up the product and then sell the product at a profit. Dealers obviously have a number of costs associated with being in business. Some of these dealer costs may include:

  • Shipping and insurance of coins and bars.
  • Marketing
  • Customer service
  • Storage
  • Office and/or warehouse expenses
  • Labor

Obviously this list is not all-inclusive, but it outlines some of the basics. A dealer markup on a specific coin or bar can vary wildly, from a percent or two to over 30 percent depending on the product. Coins or bars may not be marked up on a percentage basis, per se, but rather may simply have a dealer premium attached. For example, a dealer may offer OPM silver rounds for $.70 over spot. One must keep in mind that the dealer paid over spot for the rounds and is now selling them for just $.70 over the spot price. This means that the dealer’s gross profit before any costs is less than $.70 per round. The margins on some of these products can be razor-thin and dealers must move a lot of product in order to turn a profit. The precious metals industry has gotten more and more competitive over the years, it seems. Online bullion dealers, in particular, seem to be very cognizant of their pricing structure and what the competition may be charging.

Dealers that can buy directly from a mint may be at an advantage when it comes to price. This is because there are only two markups in this case. The mint will make the coins or bars and mark them up to make money, and then the dealer will purchase them from the mint and mark them up again. When it comes to dealers that cannot buy directly from a mint, they must buy from another dealer. Now, there is a third markup added to the equation. The mint marks the product up, the dealer who buys from the mint marks it up further and finally the third or retailing dealer marks it up again.

Another factor to consider is that the mints may have to outsource the refining of the gold and silver. This can potentially add more cost to the retail price. It is not uncommon for a mint to pay $.10 over spot for this refining. This refining cost that is incurred is simply another layer of costs associated with precious metals. Obviously, the less “middle-men” that are involved in the production and sales of the particular metals, the better price the retail buyer will be able to get in relation to spot prices.

Generally, but not always, dealers will look to sell above the spot price and will look to purchase at or below the spot price. The spread between the dealer buy price and sell price represents the dealer profit. Of course, there are some coins and products that are always bought and sold above spot depending on their scarcity, grade and other factors.

The spot price of gold, silver or other metals is a guide. Various coins, bars and other bullion products will sell for varying amounts above the spot price depending on a number of factors, such as product, mintage, relative scarcity, year and dealer markup.

All Market Updates are provided as a third party analysis and do not necessarily reflect the explicit views of JM Bullion Inc. and should not be construed as financial advice.