What is a Premium? Precious Metal Costs
The term "premium over spot" or "premium" indicates a markup in the marketplace. The term "premium over spot" refers to the increase in the price of a bullion product above the current market price per ounce of the metal in question. As an illustration, if the spot price of gold is $1,800 per ounce, but the gold coin you want sells for $1825, the premium is $25.
Example of Premiums
In a free market economy like the United States, almost everything you buy will come with a price tag. Consider a cup of coffee: the beans are bought in bulk, transported, roasted, ground, and finally served to you. The total cost of the operation is only a few cents, thanks to its efficiency. Despite this, a cup of coffee will set you back somewhere between $3 and $5.
This premium accounts for many costs throughout the process of delivering the coffee to you.
How is the Market Price Set?
The London Bullion Market Association determines the market price for gold and silver by using hypothetical and provisional mining contracts and futures. As a result, gold, silver, platinum, palladium, and other metal prices go up and down based on their demand level. This is mainly speculative, with contracts between mining firms and raw ore buyers serving as the basis for estimating future demand.
What Determines Markups on Precious Metals?
First and foremost, most mints subcontract the mining process due to the prohibitive cost of purchasing and maintaining the necessary equipment and logistics in-house. Mining requires a lot of resources, including land rich in precious metals, a large crew, and hazardous chemicals.
A large portion of the premium of a finished product is based on the mint's (or manufacturer of precious metals products) process and efficiency. In some cases, a coin from a different mint — say, the Royal Canadian Mint — may be trading at a discount to its face value. The Silver Canadian Maple Leaf and the American Silver Eagle are two examples of similar coins. Why is there a difference between the coins if they both contain one troy ounce of .999 silver?
In contrast to the United States Mint, which sends its precious metal ore to private companies for refining and blank coin production, Canada's Royal Canadian Mint does all of these processes in-house. In contrast to the USM, which is subject to a markup in this process by whichever company is awarded the contract of refining and planchet creation, RCM can bring this cost down because they control the process.
The Markup On Gasoline at The Pump
Gasoline is an everyday product that serves as an example of this phenomenon. Gasoline can be considered bullion, while Crude Oil is the raw ore from which the finished product is derived. A barrel of crude oil on the market might be $70, but a gallon of gas at the pump is usually much higher than two dollars. The extensive work required to extract crude oil from the ground, the logistics involved in refining it, and the government taxes, regulations, etc., that apply to commodities like oil all contribute to this premium.
Numismatic Value in Precious Metals
The "antique" or aging factor of certain Precious Metal products (in addition to quality) can increase the price. Bullion products, like baseball cards or classic automobiles, can increase in value with age, limited availability, and superior condition. For instance, if a well-known mint only mints a few thousand of a particular coin, those coins will likely sell at a premium. The value of these objects can rapidly increase over time, often exceeding their initial investment.
A system of auctions and bids has been in place for years in the precious metals industry. This system typically involves the product being traded between the main suppliers/importers. This is why you'll see different coin shops and websites selling the same product, like an American Gold Eagle coin, for different amounts above the spot. The markup varies widely from dealer to dealer due to administrative costs and special deals on bulk purchases. If a dealer bought at the market's peak and the price dropped, they would need to increase their markup significantly to break even. Price gouging is a common complaint, but we don't want businesses to fail because of our actions.
How to Get The Lowest Premium
In all likelihood, there is no foolproof method of determining whether or not you are overpaying for something. Gaining this knowledge takes time and some price shopping. People look around at various bullion dealers, offline and online, before settling on one they can trust. People will develop trust in a company and continue to buy from them if they consistently charge a "fair" premium for its goods.
Precious Metal Resources
- Gold Coins vs. Bullion: Advantage of Each Investment's Worth
- Most Precious Metals on the Market
- Gold Vs. Inflation: Factors to Consider
- Facts About Gold Karats
- What is Spot Price? Read Before Investing in Precious Metals
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Disclaimer: Content on this website is not intended to be used as financial advice. It is not to be used as a recommendation to buy, sell, or trade an asset that requires a licensed broker. Consult a financial advisor.