Lost in the daily commentary about gold and silver prices is the actual cost of taking possession of these precious metals. Unless you trade in paper GLD or SLV, or you store your bullion in overseas vaults with companies like Goldmoney, the actual cost to purchase gold and silver can diverge from the COMEX spot price by as much as 36% (as I will show below). We have analyzed the premiums for these two monetary metals over the past year and a half, and we hope to offer some perspective on "real" market prices.
For the benefit of novice investors: Spot price is the settlement price per ounce of gold and silver for future delivery through the Commodities Exchange (COMEX). This price fluctuates by the minute, like stocks on the NY Stock Exchange. The "spot" is the price referenced by talking heads when referring to the "price of gold" or the "price of silver," etc, and it is a value used by dealers when setting bullion prices. The premium per ounce is the markup charged by mints and dealers when trading consumer-grade bullion (i.e. anything smaller than 400 oz gold bars). Together, these two numbers comprise the total cost of purchasing precious metals in physical form. The same definitions apply to platinum and palladium.
In contrast to the spot price, where there is a clear historical price record, minimal reliable information exists concerning fluctuations in metals premiums. This is because measuring accurate market premiums is an inexact science and highly labor-intensive, as premiums vary considerably by mint, supplier, product, weight, order volume, and of course, demand. As part of our ongoing company research, we analyze market moves in premiums by using very basic criteria, focusing mostly on high volume dealers and popular products to paint a broad picture of price movements. Note: These are approximations only.
Data through March 20th
For the purposes of this study, we have included only the most popular gold coins: the one ounce (by gold weight) US Mint Eagles, Royal Canadian Mint Maple Leafs, and the grandfather of them all, the South African Kruggerand. Over the past seventeen months, gold's average spot price has been $975.15, and its average premium per ounce for an order of twenty ounces has been $58.18. The percentage of premium to total (again, defined as 'spot' plus 'premium') is 5.6%. This percentage peaked in November of 2008 at 9.4% ($760.86 spot + $79 average premium) and currently sits at 4.2% ($1,119.85 spot + $49 average premium).
Some will argue that ancillary costs such as shipping and insurance should be factored into the total, but since the industry standard is "free shipping and insurance," these costs are not measured.
SILVER: GOVERNMENT ISSUE COINS
Silver prices vary considerably by marking. Private mints producing silver "rounds" compete for market share with government mints producing silver "coins." Additionally, the popularity of larger forms of silver such as 100 oz and 1,000 oz bars causes the silver market to vary more widely than the gold market.
We have focused specifically on the premiums for one ounce coins, and the chart below highlights the two most popular government coins: the US Mint Eagles and Royal Canadian Mint Maple Leafs.
Over the past seventeen months, silver's average monthly spot price has been $14.51, while the average premium for an order of 500 ounces of government coins has been $3.53. The percentage of premium to total is 19.5%. This percentage peaked in December of 2008 at a whopping 36.8% ($10.28 spot + $5.99 average premium) and currently sits at 12.9% ($17.17 spot + $2.55 average premium).
The incredible spike in premiums at the end of 2008 and into 2009 caused many investors to "arbitrage" their government coins. Investors would sell their coins and repurchase cheaper, private issue silver rounds. In doing so, they increased their total silver holdings without any additional cash outlay.
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