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Drama llama, misconceptions and price surging.
It often time amazes us that Gold and Silver are often a point of contention in everyday conversation. Some folks disregard it completely as an investment and say things like, “you can’t eat Gold during the end of the world,” or “Gold is a lousy investment.” Now, I get it, with the advent of social media, people have begun to really “shoot from the hip” with the first thing that comes to mind and that most people won’t even bother researching something before speaking on it, as if they were some sort of expert on the topic. I’ve quite literally worked in the industry for 10 years now and anybody on Facebook knows more than us. Seriously, just ask them.
With the pointless Facebook drama out of the way let’s quickly talk about why we are seeing this latest market rally and then we can clear up some huge misconceptions about our industry. First and foremost, stimulus!
It’s official, you are getting another stimulus check for the same amount ($1200). Some folks are worrying that they might not be eligible, but if you received a check last time, you will receive another check. If you are unemployed, your extra unemployment benefits will be slashed by approximately 80% and if you are a small business (defined as under 300 employees) and have seen a decrease in revenue of 50% or more, you may be eligible for a second PPP loan. The Payment Protection Plan loan covers 2 entire months of payroll and only a small fraction of it needs to be paid back.
Additionally, the European Union announced a $2.2 trillion stimulus across its economic sector. These stimulus bills are creating an increase in the money supply, decreasing its value, subsequently increasing the value of Precious Metals. Another factor is that tech and automotive industries that will benefit from these stimulus plans will begin purchasing noble metals again meaning an increase in demand which will move the market price north. We cover this in-depth in our blog last week, it is about a 4-5 minute read but is an important one. Read it by clicking the button below.
The million dollar question.
The million-dollar question is “are the metal markets feeling the impacts of the first wave of stimulus checks and business loans or are they reacting to the new ones?” If you’ll remember, the fed essentially printed $2 trillion out of thin air back in April and the metal markets didn’t do anything. We are not into speculation but should you try and find this answer out, you’ll either have to wait and see or conduct your own research/consult with your financial advisor.
Misconceptions about the Precious Metals Industry.
Unbeknownst to most people, there are heavy regulations covered under the Banking Secrecy Act regarding Precious Metals purchasing, selling, importing, and exporting. This is because Gold and Silver have been used to launder money in the past, henceforth the need for a comprehensive Anti-money laundering policy. There are also a few conspiracies behind this, mostly because world Governments oftentimes make Precious Metal ownership illegal. The U.S. even banned and confiscated Gold and Silver from the U.S. citizens in 1933 and the ban lasted until the 1970s. Take that as you will.
Due to these regulations, there are only 3 suppliers, plus the secondary market in the United States in which ALL coin shops and online bullion retailers purchase their goods. The misconception is that each retail company holds a massive inventory and slowly releases some of its stock, only when it benefits them. This is largely untrue because unlike other goods, for example, clothing, it would be a massive tax liability to have an inventory at the end of the year. Not to mention the cost of even a small inventory of Precious Metals can quickly add up. If you had a single shoebox size of 15 Gold PAMP Kilos on hand, you’d have $1 million’ worth of inventory.
Market Loss and Risk Mitigation
Another reason bullion retailers do not have a large (or any) inventory on hand is market loss. If a company decided to purchase several million dollars’ worths of Precious Metals as inventory and the market sees some sort of adjustment, that company could lose 5, 10, 15% overnight. If they do not lower their prices following the market then those coins, bars or rounds will not sell, meaning they will not only sit on their inventory but be taxed each year for the entire inventory unless they move it.
This always comes to a shock to folks but, by in large, the major bullion retailers ‘pool’ inventories together at several big distribution centers around the United States. This means, regardless of who you buy from, that metal is being drop shipped from the same place, out of the same inventory. This always leaves people wondering, then why do prices seem to fluctuate between retailers? The answer is volume and leverage. It’s no secret that the profit margins from selling precious metals are impossibly low compared to any other industry. For example, you might see a sale of 50% or 70% off a piece of clothing at a department store, but even with that price reduction, that product is STILL profitable for that business.
Precious Metals on the other hand have a market spot price associated with it and then a small mark up directly from the mint. Then somehow a tiny mark up from the main suppliers and an even smaller mark up from the retailer you purchase it from. Add in any sort of market volatility and your playing with fire, so retailers rely on massive volume to keep the lights on. Similar to a grocery store or gas station, that one single sale of a piece of corn won’t pay the electric bill but selling millions of pounds of corn might get you there.
This is also why you do not see department stores charging you a processing fee of 3% simply because you checked out with a debit or credit card. These fees get taken by the credit card companies from the point of sale which is easily written off by a department store. 3% to a bullion dealer is often timed their entire profit margin. This is why almost all online bullion retailers will give you volume price discounting. It’s not because they are making so much more money by enticing you to buy more, it’s because their overall revenue increases giving their wholesale purchasing department more leverage to save a few cents over spot for that particular trade ticket. Saving a nickel per coin on a pallet of 1 oz American Silver Eagles (25,000 Silver Coins or $625,000 worth of Silver) saves that bullion retailer a whopping… Get ready… $1,250.
It’s not hard to imagine that small of a saving being wiped out from a mere .5% decrease in the market, hence the need for inventory pools. When people say the Precious Metals industry is the least profitable industry besides owning maybe a gas station, they are not lying. But, then again Gas Stations sell junk food and booze so they do well with that. This is why the old man at your local coin shop dealer has an impenetrable poker face when you attempt to lecture him on spot price vs. his mark up. Lol! This isn’t to say their aren’t folks that operate pawn shops or online scam websites that take advantage of people. Not to mention the threat of counterfeit bullion for sale on auction websites and websites hosted in places like China or the Middle East, where counterfeiting is not taken serious by their Law Enforcement entities like it is here in the U.S... It should go without saying that you should ONLY purchase from reputable online retailers based in the U.S., UK or Canada as well as well-established local coin shops.
What is Gold spot price anyway?
A market spot price is a theoretical number derived from supply and demand forecasts. Demand forecasts are calculated based on provisional and future mining contracts. Supply forecasts are extremely difficult to calculate and have several factors, mostly based on industry reports as more than 70% of demand for noble metals derive from tech sectors and automotive industries. Another factor is the value of the currency you are adjusting for. You might notice spot price go up after a stimulus bill or spending plan is announced by the Government. This is not necessarily that the value of Gold and Silver went up but the value of the currency you are buying went down in value.
What's the difference between physical and futures?
Physical precious metals are tangible, unlike cryptocurrencies or stock, you can hold the bullion products in your hand. Futures are just like owning bonds or stock as it is not physical nor redeemable as physical. People choose physical because it is unlike another investment. After all, you can hold it in the palm of your hand and has a numismatic quality to them as well. This means it can not only derive value from its noble metal content, but age, grade, purity (.999+ fine usually), and collectability of the coin, bar, or round can also increase its value. Additionally, some folks will note that it is less susceptible to market manipulation and if the power goes out, market trading is halted or some terrible event happens your investment is safe and in your possession. The cons of physical precious metals are the ever-looming threat of it being stolen and extra care should be given to proper storage of your bullion to prevent this. It’s also a good idea to have your stack insured.
Beautiful 1 oz Gold Republic of Somalia "Gold Elephant" coins manufactured by LEV in Germany.
Buy Low Sell High?
You’d have to consult your financial advisor to find out what type of Precious Metals investing strategy you might want to pursue. With that said, like any other physical commodity (property investing comes to mind) you shouldn’t look at Precious Metals as a quick flip. That isn’t to say there aren’t folks who day trade commodities and make money from it but as we mentioned above, the margins are extremely low. Precious Metals are a tool used to hedge your wealth from inflation (dollar devaluation) caused by Government spending. It also derives an added and ever-increasing value from it being finite (limited) in nature.
Most folks choose Investor Crate (or buy every month from another dealer) regardless of market fluctuations. This method is called dollar-cost averaging whereby purchasing all year long yields you the approximate average price of that year. The idea is purchasing the metal year after year stockpiling the shiny precious mountain of metal to sell it all at once for retirement, a large purchase or better yet, giving it away as a surprise inheritance to increase your family's wealth.
Thank you for taking the time to read our blog, besides a shameless pitch for our precious metal subscription crate service (see below) we try to mitigate perfunctory information and annoying advertisements on our blog. These serve to be informative and entertaining without annoying monetization efforts. As always, this article as well as any information found on our website is NOT meant to be financial investment advice. Under no circumstance should you purchase or sell Gold, Silver, Platinum, or anything without first consulting your certified financial advisor! Seriously!
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It was great for a minute at least.
Well this is fun to look back on now…
Interesting blog with a variety if random thoughts. With precious metals at high prices, its still a good investment. However, I will opt to wait for silver prices to fall.