What is a premium? Precious Metals 101

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Precious Metal Premiums

Premiums, Spot price, Bid price, Ask price?

  A premium or “premium over spot” is industry jargon for mark up. Premium over spot indicates what the mark up is for a particular bullion product over what the current market price per ounce is for that particular metal type. For example, if Gold is trading at $2,000 per ounce on the market but the Gold coin you want is selling for $2020, then the premium is $20.

It is no secret that in a capitalistic society such as the one of free enterprise in the United States, virtually everything you purchase has a markup. Take a cup of coffee for instance; the coffee beans are purchased in bulk, delivered to your local coffee shop, ground, and roasted and served to you. The entire process, through efficiency, costs maybe a few cents. Despite this being the case, you pay around $3-5 per cup of coffee.

This mark up covers the profit of the coffee bean grower, the logistic costs to deliver the raw beans, the cost of the equipment and electricity to roast the beans, the wages of the barista, the cost of the cup and the gross profit margin or expectations of the company facilitating this whole process. 

Investor Crate Generic Silver Bullion

Lower premiums can be found on Private Mint products such as these 1 ounce Silver Rounds.

Who sets the market price?

  The market price is set by the London Bullion Market Association and is based on theoretical and provisional mining contracts and futures. In other words, the demand of Gold, Silver, Platinum, Palladium, and other metals is what drives the price either up or down. Much of this is based in speculation based on contracts from mining companies and raw ore purchasers to gauge what the current demand will be in the future.

Investor Crate Big Bar Silver

1 ounce and 10 ounce Silver Bars from private mints in the U.S. and Canada.

What drives markups for Precious Metal products?

First and foremost, most mints contract out the mining process as this brings with it extremely expensive equipment and logistics. Mining operations use heavy equipment, dangerous chemicals and large crews as well as having to deed, purchase or rent land that may be rich in precious metal veins.

The process and efficiency of a mint (or manufacturer of precious metals products) determines much of the premium of a finished product. For example, you may see a coin minted by the Royal Canadian Mint that is trading at a lower premium than a coin minted by the United States Mint. Both coins, for example the Silver Canadian Maple Leaf and American Silver Eagle are virtually the same except its design. Both coins, contain 1 troy ounce of .999+ Silver, so why the difference?

The Royal Canadian Mint refines precious metal ore into its pure form and makes planchets (blank coins) in house, whereas the United States Mint actually contracts out private companies to refine the metal and create the blanks. Because RCM controls this process, they are able to bring this cost in the process of creating the bullion down and the USM is subject to a mark up in this process by whatever company is awarded the contract of refining and planchet creation. 

Another commodity as an example.

A common example of this is another commodity that everyone is familiar with which is gasoline. Gasoline is essentially bullion and Crude Oil is the raw ore that is used to make the final product. Crude Oil could trade for $55 per drum (55-gallons) on the market but you often spend much more at the pump than just a dollar. This markup is essentially the premium and is calculated by the long process of extracting the crude oil from the ground, logistics, refinement and in this commodities case government taxes, regulations, et cetera.

Numismatic and other fees.

Some Precious Metal products have a unique “antique” or aging factor (as well as quality) that can bring the price of the product up as well. Similar to baseball cards or antique cars, the age, supply and quality of bullion products can also raise the price. For example, if a popular mint produces some short-run of a particular coin that they only end up minting a few thousand of, they can come off the press at a much higher than usual premium. With time, these same items can quickly rise in value, much further than their Precious Metal content.

Precious Metals and the industry it encompasses often trades the product through main suppliers /importers and a system of bidding and auctioning has been set up for years. This adds another variable to the overall premium and is why you can find a product like an American Gold Eagle coin selling for $20, $25, $50, $100 over spot at various coin shops or online stores. There is no set premium per item and depends a lot on overhead or what a particular dealer managed to negotiate during purchasing. Another variable in the dealer realm is when the product was purchased, if they purchased high and the market dips, their mark up will be quite high to avoid losing money. Many folks see this as price gouging but we would hate for companies to lose money and go out of business. 

In conclusion

The list of variables in regard to a markup in our industry is enormous, from mining, to refining, to planchet creation, to minting, to efficiency and volume, to logistics, to bidding, to dealer to customer makes the buying and selling of precious metals kind of annoying. This is why often times when an inquiry such as, “well how come this guy has it for .10 cents cheaper, you guys are a rip off!” goes ignored. Not to mention, if taken by face value, the precious metals industry actually has the lowest profit margin and mark ups of ANY other industry. This is why our industry often times charges you for a credit card processing fee, because it is usually higher than gross profit. This is also why you will see 50% or 70% sales at stores that sell t-shirts or TV’s, but you will NEVER see sales like that for Precious Metal products.

How can I get the lowest premium possible?

Unfortunately, there is no perfect way to know whether or not you are paying to high of a premium for something. This comes with experience and price hunting. Generally, what we see is folks will shop around at either various local bullion dealers or online outlets until they find a dealer they trust. Once they find a company that always has a ‘fair’ premium on their products, they will just continue using that company as a relationship of faith has been built.

What about you guys?

We came up with a unique way to offset market prices (peaks and valleys) as well as premiums by way of dollar-cost averaging. Essentially, we are a precious metals subscription crate company sort of like Loot Crate but for coins, bars and rounds. The idea is, you pick what price and type of metal you wish to receive each month and we place bulk purchase orders based on our subscriber base needs. We then distribute the physical metals and ship you your portion each month.

By purchasing in bulk we do get lower premiums and by buying all year long you tend to get that years annual average. This helps and has the potential to offset a “bad” month where prices went super high by levying the lower market price months. It’s also fun to receive a treasure chest of Gold and Silver coins each month so theres that factor as well.

We may not be the best option for you in particular but we are an option none the less, give us a try if you want! As always, we hope you found this blog helpful. This blog is not intended to be investment advice and as always we recommend you consult a certified financial adviser prior to making any decisions with your money. Oh and don’t forget to hit that like button, this gives us an indication of wether these blogs are helping people and wether or not we should be writing more! Thanks! 

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