May 1, 2017 Midas

The Spot Price and the Bullion Trade…How It Works…

We recently received a bad review from a client who was upset that we didn’t pay full spot for a 1 ounce Krugerrand. In my interaction with this client surrounding his review it became very clear that he had a warped understanding of what we routinely refer to as the “spot price” and how that number impacts the precious metals trade as a whole. That disconnect lead me to the idea for this blog post…

Let’s discuss…

What is the spot price defined
• How does that spot price impact the coin and bullion trade
• What common assumptions are misinformed and down right incorrect


The spot price is well defined by Investopedia as…

A spot price is 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. While spot prices are specific to both time and place, in a global economy the spot price of most securities or commodities tends to be fairly uniform worldwide.

 

In contrast to spot price, a security, commodity or currency’s futures price is its expected value at a specified future time and place. In the financial markets, spot prices are most frequently referenced in relation to the price of commodity futures contracts, such as contracts for oil, wheat or gold. A futures contract price is commonly determined using the spot price of a commodity, expected changes in supply and demand, the risk-free rate of return for the holder of the commodity, and the costs of transportation or storage in relation to the maturity date of the contract. Futures contracts with longer times to maturity normally entail greater storage costs than contracts with nearby expiration dates. For example, on May 14, 2016, the spot price for wheat was $4.78 per bushel, the July 2016 futures price was $4.90 per bushel, and the December 2016 futures price was $5.22 per bushel.

 

But what does that mean in the real world?

How the spot price interacts and dictates value in the real-world bullion trade is not as simple as it may seem. First you have to understand that no two rounds are created equal. A ’round’ is the common reference to a coin shaped piece of bullion. Yes, investment grade bullion typically might contain 1 troy ounce of gold (or silver) but that doesn’t make them equal. What dictates the real pricing for bullion are the same economic laws that dictate pricing for nearly everything we buy or consume. Supply and demand is also a major factor that I will discuss throughout this article.

 

Now let’s apply some common retail logic to this concept. To begin, understand that government minted rounds are more desirable, so therefore more valuable. Non-goverment rounds from well established business, such as Johnson Matthey, would come in a close second. And then the lesser known, or lesser established, mints would be again slightly less valuable. A rough (or poured) bar is less desirable than a polished bar as well.

 

This concept is akin to paying for a Coca-Cola versus the store’s generic brand cola. The name brand products typically have a higher retail price tag. Bullion works the same way with the government products being the equivalent of a high-end name brand. Again, apply some common sense retail logic. Are every name brand of blue jeans equal in price? Nope, they certainly are not. This applies to the bullion trade as well. One government’s product might be more desirable, thus more valuable, than the next.

 

How does the spot price impact the entire precious metals trade?

Buying and selling bullion are two distinctly different actions. When you buy an American Gold Eagle, or AGE, from a coin dealer you will pay spot plus a premium. The premium is the profit to the coin dealer and it subject to fluctuations from the retail market; again see Supply and Demand. Conversely when you sell bullion you are typically going to get less than spot. How much less depends on a plethora of factors including brand names (as we discussed above), supply and demand, very detailed condition factors, etc. Before we go further down this road let’s take a look at how the precious metal trade works from start to finish…

 

From start to finish…

» The mining industry digs precious metal ore from the ground and sells less than pure ore, and dore bars, to refiners at a rate lower than the world spot price.

» Refiners take the rough materials and refine them to a pure product eliminating the natural impurities; think gold bars. That product is then sold to mints at very close to, but still under, the spot price.

» Mints, both government and private, then create retail products like bullion coins (also called Rounds, think AGE) and bars. The mint sells those bars to wholesale and(or) retail dealers at a rate typically just slightly above the spot price.

» Retailers then offer those minted rounds and bars to the public at a rate well above the spot price.

 

Considering the chain of transactions above, each round or bar is not equally priced. The top-end brand names are going to cost the Retailer more and vice versa. The Retailer is likely to price the top-end name brand items at a higher premium above spot. If you want to own an AGE, it will likely cost you slightly more to purchase.

 

What about when it’s time to sell?

When it comes time to sell your rounds, again consider the chain of transactions above and apply some common sense.

 

If 123Coin Dealer can buy the name brand rounds directly form the mint in perfect, untouched, unencumbered condition for slightly over spot and then command a premium, what is he willing to pay for the older, floated, touched and handled rounds in your pocket? It’s going to be less than 123Coin Dealer can pay for them brand new – a lot like your used car. Is 123Coin Dealer going to sell your rounds for a premium and collect a profit? Absolutely, if they can; but not necessarily always.

 

It is likely that they will move your rounds to a 3rd party broker if, for instance, they have too much inventory. The broker may or may not pay spot, again depending on the conditions and market factors that we keep discussing. What the broker will pay is going to dictate what 123Coin Dealer will actually pay you in order for 123Coin Dealer to make a profit. This is how the trade works.

 

If 123Coin Dealer, or Gold Rush, is buying your bullion there has to be a profit in order to provide that service.

 

The Details are Paramount…

Anyone buying bullion from the public, as Gold Rush does, is going to operate the same way. We are going to buy your rounds at some % of the current spot value depending on the details → Who made it? Where does it fall in the retail scheme of value? What very specific condition is it in? How many do you have (volume can fetch higher prices in some instances)? What is the world market doing (this is where supply & demand kick into high gear)? What laws are in place that dictate what the buyer can do with the items and when? Laws that require businesses like ours to hold items for some period of time create risks that lowers the value of the item since the value of the item is subject to substantial change from one minute, or day, or week, to the next.

 

There are also other factors and cost involved, like shipping and insuring large parcels of valuables. This laundry list of factors and context make for an ever-changing landscape. Day to day, week to week, month to month can create a very different reality from the previous. These are all things to keep in mind when shopping for the best price on your bullion.

 

But don’t some people pay spot?

The short answer is yes, but no not really. On occasion you might run across a retailer that needs inventory and is willing to pay spot for a particular type of bullion in order to stock his shelves. That scenario is typically short lived and very inconsistent. If you stumble upon someone paying spot, you should take it and run!

 

When their inventory is flush that same dealer is likely, in our experience, to start paying far less for the exact same items. One of the many benefits to doing business with Gold Rush is that our massive and consistent volume allows us to fetch the most money for our bullion trades. That means that we will consistently and continuously pay you as aggressively as possible. Because we are not a retailer our inventory never gets full. And our ability to buy is never constricted by having to make huge investments in inventory and then waiting to liquidate that inventory one round at a time, as will happen with a coin dealer selling to the public.

 

What about selling to a website?

There are plenty of websites that advertise paying spot for certain items though most do not actually pay full spot. A quick Google search will yield a wide range of offers below spot, as every other bullion buyer would offer, with very few exceptions. Read the fine print and apply some common sense. If it sounds uncharacteristically good, it’s probably riddled with fine print and a long list of conditions that have to be met in order to actually get that value. The fine print typically dictates that you MIGHT get spot if you have a minimum quantity (typically 5 ounces, sometimes a lot more) and those 5 ounces are in perfect condition (‘perfect’ is defined by the buyer, not the seller). Once the on-line dealer receives your rounds they can absolutely come back to you and change their rates. It’s all detailed in the fine print and disclaimers.

 

Shipping…

You will also have to ship and insure your rounds at your own expense. Think about that for a minute. Do you want the FedEx employee knowing what you are shipping? No? So you would need to have your own packaging materials that properly protect your parcel and it’s contents throughout it’s journey. 5 ounces of gold plus all of the packing isn’t going to weigh a ton. But it will weigh a pound or two. Are you willing to ship your 5 ounces of gold through a ground service and wait a week for delivery? In order to lock in your price, you will likely be required to overnight the package. That is going to cost you plenty via any carrier.

 

Insuring…

USPS certified mail offers $5000 in insurance for free. However, as I right this article, that doesn’t cover the full value of 5 ounces of gold. You will have to buy 3rd party insurance for your package. 3rd party shipping on a package with a $7,000 value is going to cost well over $100 in addition to the shipping cost.

 

Math only works one way…

Do the math! You are getting spot less the couple hundred dollars it cost to package, ship, and insure your parcel. Plus you have to wait for your money. And there is still no guarantee that you will actually get spot when your package arrives. That is at the discretion of the on-line buyer you chose to do business with (again, read the fine print). Your AGEs do not have serial numbers to distinguish one from the next. How would you construct an argument that your rounds were not damaged before you shipped them? How are you to know that the on-line buyer returned the exact same rounds that you originally shipped when they change their offer and you demand a return? Without a lot of preparation before shipping, you simply can not.

 

We won’t even get into the effort, time, energy, and worry that factors into doing this.

 

Common misconceptions…

One of the largest, and in my experience most common, misconceptions is that an ounce of gold (or silver) is just an ounce of gold. In 5th grade logic, maybe so. In the real world bullion trade, not so much. I have repeatedly discussed the ins and outs of brand names, condition, market conditions, supply & demand, etc. in this article. All of those factors are a constant source of input for the ultimate value of your bullion on either side of the transaction – buying or selling.

 

Another common misconception is that a gold ounce will always trade at spot. The dynamics of the precious metals markets simply dictate otherwise. But don’t take my word for it. By all means do your own research and look closely at the results. You will find website after website that offer less than spot across the board. The genuine opportunities to sell some type of rounds at full spot are going to be a tiny fraction of the total and riddled with fine print and disclaimers. Again, don’t take my word for it and do your own research.

 

Why Do Business With Gold Rush?

We offer a no hassle, no obligation, no pressure environment to sell your bullion for immediate cash. Everything happens right in front of you; your materials never leave your sight. In just a few minutes we can evaluate your items and get accurate weights and authentications. Then we will make an all cash offer on the spot. The decision to sell is always yours to make. Bear in mind that by law we have to take care of some paperwork and documentation with every transaction. That part of the process is quick and easy but does require you to have a valid government issued ID in your possession at the time of the transaction.

 

On top of offering aggressive pricing across the board, the biggest benefit to doing business with Gold Rush the lack of waiting. No wire transfers to worry about so waiting days for your money to show up. We will pay you immediate cash, or a check upon request. There is no waiting for your package to arrive and then be evaluated. Also no worrying about your parcel getting lost in the mail. And that means no need for expensive shipping and insurance. You sit down at the desk, speak with an expertly trained professional, do a little math and a little paperwork, then leave with cash!

 

Also, as I mentioned earlier, one of the many benefits to doing business with Gold Rush is that our massive and consistent volume allows us to fetch the most money for our bullion trades. That means that we will consistently and continuously pay you as aggressively as possible. Because we are not a retailer our inventory never gets full. And our ability to buy is never constricted by having to make huge investments in inventory and then waiting to liquidate that inventory, and recover our working capital, one gold round at a time, as will happen with a coin dealer selling to the public.

 

This has made Gold Rush one of the largest buyers of precious metals from the public in Colorado, and in the western United States.

 

In Summary…

I hope the information in this articles helps you wrap your brain around how the bullion trade really works. For the most part, the particulars to the trade are not common public knowledge.

 

We want to earn your business. We know you have choices and we want to work hard to ensure that Gold Rush is your go-to for selling any kind of precious metal.