New gold investors will come across the words like “premium” and gold “spot price”. It is important for buyers and seller to understand what these terms mean so they can have realistic expectations about the price of what they are buying or selling. The global gold spot-market is always open. The global markets take turns. First it’s the European market followed by the Asian market. It closes off when the U.S market closes. The market price of gold, as of any other commodity or goods, is mainly determined by supply and demand which is in full effect 24 hours of the day.
The gold supply consists mainly of private investors, funds, central banks, insurance companies, etc. Gold supplied by refineries and scrap gold smelters plays a small role. It is very important to understand what the spot price of gold stands for. The gold spot price is the price of gold, without being in some physical form like bars or coins. The global gold spot-price is also used as a basis future contracts where the delivery of physical gold isn’t necessarily the main goal.
When a buyer wants to buy physical gold, a bullion premium is added to the gold spot price. The bullion premium is simply the “mark-up” or “top-up”. The word term bullion premium can be misleading, because it not only applies to bars but coins as well.
How does the premium work?
The price for each ounce of bullion is made up of the spot price and the bullion premium. Here are the composition of some common coins:
Silver Eagle: 80% spot price + 20% premium
Silver Canadian Maple Leaf: 84% spot price + 16% premium
Gold Eagle: 96% spot price + 4% bullion premium
How are bullion premiums determined?
Bullion premiums depend on certain key factors, these include:
- The current supply and demand factors
- Global economic conditions.
- The type of bullion being sold.
- The seller’s objectives.
When gold is to be delivered, it needs to be in a physical form, however the production of bullion coins and bars comes at a cost. There are other costs that will affect the price such as transport, insurance and handling. In addition to that a profit margin has to be added because after all gold bullion buyers have to run a profit-making business. All these costs are covered under the “premium” that a gold bullion dealer charges. Gold buyers frequently talk about the spot price. This price is a global price that is not negotiable but when buying gold, you can still negotiate the premium price.
Basically, to work out what the gold sale price is you will have to add the spot price to the premium. The premiums may vary depending on various factors like the market supply and demand, the economic conditions, the gold dealer’s own objectives and so much more. However, scarcity and rarity can affect the premiums a bullion dealer charges. If there is a shortage in the supply of a particular form of gold bullion. Sometimes when the demand is low, gold dealers may decrease the premiums to get more buyers.
When the demand for gold is high, gold dealers may increase premiums if there is an increase in gold demand but they may do so to reduce sales to safeguard their own stocks so they don’t find themselves caught out with empty vaults and unable to fulfil orders. An overflow of gold stocks can also lead to low gold premiums. A gold bullion dealer who is new in the market could offer discounts on the gold premiums to attract buyers. A gold bullion dealer may use the premiums as a strategy to compete with competitors. The spot price is important but so is the premium. When buying gold, understand what the premium means and how it can affect you.
