Ep.4 Season 2 - Buying Gold and Silver - Understanding the Spot Price, Premiums and Total Spread

Summary

In this video, Marki AXI from Inside the Vault breaks down the pricing mechanism for precious metals like gold and silver. He explains how the spot price, premiums, and discounts work in both buying and selling metals. Viewers learn about the supply chain's impact on premiums and how different products can affect total spreads. Marki also discusses key concepts like bid/ask prices, the importance of the total spread for long-term investments, and the value of buying well-known products with better resale value. Additionally, he offers advice on avoiding scrap metal and graded coins, which may have high premiums and wide spreads.

Takeaways

• 😀 The spot price represents the live, real-time value of one ounce of pure precious metals like gold, silver, platinum, and palladium.
• 😀 There are two spot prices: the 'bid' price (what buyers are willing to pay) and the 'ask' price (what sellers are asking).
• 😀 When buying precious metals, the total cost includes the spot price plus a premium, which compensates the supply chain for production, shipping, and distribution costs.
• 😀 The premium varies based on the metal, product, and the efficiency of the minting process, affecting the total cost of the purchase.
• 😀 When selling precious metals, you'll face a discount, which is the price dealers are willing to pay for your metals, usually below the spot bid price.
• 😀 The total spread is the difference between the price you paid for the metal (spot price + premium) and the price you receive when selling it (spot price - discount).
• 😀 For long-term investors, minimizing the total spread is crucial as it impacts the return on investment over time.
• 😀 Some products have better total spreads than others due to manufacturing efficiency, production costs, and market demand, even if they are made of the same metal.
• 😀 Silver typically has higher premiums than gold, not due to dealer profits but because the fixed costs at the mint are higher as a percentage of silver's lower value.
• 😀 It's important to evaluate both the premium at purchase and the buyback price when choosing products to invest in, as this determines the overall investment value.

Q & A

What is the spot price in the precious metals market?

The spot price is the live real-time value of one ounce of pure precious metals (gold, silver, platinum, palladium, or rhodium). It reflects the current market value and is updated constantly based on live trading.

What are the two prices typically shown when displaying the spot price?

The two prices are the spot bid price, which represents the price buyers are willing to pay, and the spot ask price, which is the price sellers are asking for when selling the precious metals.

Why does it cost more than the spot price to buy gold or silver?

The extra cost above the spot price is known as the premium. This premium covers the entire supply chain process, from minting to distribution, shipping, and retail margins, all contributing to the final price the buyer pays.

What is a discount when selling precious metals?

When selling precious metals, investors typically receive a discount, which means the price offered by buyers is lower than the spot bid price. This discount reflects the profit margin that dealers or buyers make during the transaction.

What is the total spread, and why is it important?

The total spread is the difference between the price paid for a precious metal (spot price + premium) and the resale price (spot bid - discount). It's the most crucial figure to consider when assessing the long-term return on an investment in precious metals.

Why do some products have a better total spread than others?

The total spread varies based on factors such as production costs, minting efficiency, and the location where the product is manufactured. More cost-effective production and efficient supply chains generally result in a better spread for the consumer.

What is the typical premium for a silver coin compared to a gold coin?

The premium for silver coins is typically higher in percentage terms than for gold coins. For example, silver premiums can range from 9-10% over the spot price, while gold premiums tend to be 3-4%. This is due to fixed production costs and the relative value of gold compared to silver.

Why might an investor prefer a Silver Eagle over a Silver Maple Leaf despite its higher upfront cost?

While the Silver Eagle may cost more initially, it has a better resale value, resulting in a narrower total spread. A narrower spread means the investor is likely to receive more money when selling it back, making it a better long-term investment.

Why should investors avoid buying scrap metal?

Scrap metal, which is impure or unfinished, may seem like a good deal at or below the spot price, but it will need to be refined before it can be sold. As a result, the resale value is often much lower than the spot price, making it a poor investment.

What are the risks of buying graded coins as investments?

Graded coins often come with high premiums, which can lead to a wide total spread. Unless the investor is well-versed in the market, they may not get a good resale value, meaning the investment could result in a significant loss when sold.