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Infographic: How are silver and gold bullion premiums calculated?

by Jeff Desjardins | posted with permission of Visual Capitalist | December 3, 2015

How are silver and gold bullion premiums calculated?

 

The price paid for each ounce of bullion is composed of the metal’s spot price and the bullion premium.

Here’s the price composition of some common rounds:

  • Silver Eagle: 80% spot price / 20% bullion premium

  • Silver Canadian Maple Leaf: 84% spot price / 16% bullion premium

  • Gold Eagle: 96% spot price / 4% bullion premium

How are these bullion premiums determined? How can bullion buyers take advantage of the lowest possible premiums?

Difference between spot prices and bullion premiums

Spot price: The current price per ounce exchanged on global commodity markets.

Bullion premium: The additional price charged for a bullion product over its current spot price.

The calculation for bullion premiums depends on five key factors:

  • The current bullion market supply and demand factors

  • Local, national and global economic conditions

  • The volume of bullion offered or bid upon

  • The type of bullion products being sold

  • The bullion seller’s objectives

Bullion supply and demand

The total amount of supply and demand of bullion is a major influence on bullion product premiums.

Bullion dealers are businesses and they are actively trying to balance product inventory and profitability. Too much inventory means high costs. Too little inventory means angry customers. Fluctuations in the gold and silver markets affect bullion market supply and this impacts premium prices.

For example, in the Western hemisphere during the summer, calmer price patterns mean the bullion supply tends to increase. Sellers mark down their prices to attract market share.

During other months, silver and gold prices tend to have more volatility. This leads to increased buying and selling, and bullion sellers react accordingly. Some may mark up prices to prevent running out of inventory, or to capture profits.

Economic conditions

Depending on their size and significance, market events can affect bullion premiums locally and globally. Examples:

In a small town with only one brick-and-mortar coin shop, the dealer may boost premiums to guard against running out of inventory.

In a country like Venezuela, where the local currency is losing value at an extreme rate, locals may opt to buy bullion to preserve their wealth. This means higher premiums.

At a global level, in the event of a large crisis (similar to the 2008 financial crisis), it is likely premiums would increase significantly as demand spikes and options diminish.

Volumes being sold

Every seller incurs costs on each transaction such as time, overhead or payment processing costs. For a seller, a single transaction for one ounce of gold may have similar transaction costs as a 1,000-ounce transaction.

Therefore transactions with higher volumes of bullion have their costs spread out. As a result, premiums tend to be higher on small-volume purchases and lower per ounce on high-volume buys.

Form of bullion for sale

As a general rule, the larger the piece of bullion is, the less the premium costs per ounce. It costs a mint far less to make one 100-ounce silver bar as 100 rounds of one ounce each.

There is also typically a significant difference in premiums between government and private mints. For example the most popular bullion coins in the world are American Silver and Gold Eagle coins. The U.S. Mint charges a minimum of $2 per ounce over spot for each Silver Eagle coin and more than 3% over spot for each Gold Eagle coin it strikes and sells to the world’s bullion dealer network.

A private company like Sunshine Minting will sell its silver rounds and bars in bulk for less than half the premium most government mints will sell their products for.

Bullion seller’s objectives

Whether a large bullion dealer or a private individual, the seller will almost always want to yield the highest ask price obtainable for the bullion.

That said, just because one wants to receive a large premium on the bullion doesn’t necessarily mean the market’s demand or willing buyers will comply. Dealers must consider these factors when setting premiums:

  • Market share objectives

  • Competitor strategies

  • Price equilibrium strategy

If a dealer sets the price too high, buyers will likely choose to go to a lower-priced competitor. If a dealer sets the price too low, it could end up selling out of inventory without garnering enough profit margin to pay for the company’s overhead costs.

Dealers and sellers are both typically trying to find the price equilibrium “sweet spot” where the time required to complete a sale is minimized and the seller’s profit is maximized. This is more difficult than it sounds, as there can be thousands of factors at play when establishing the best possible premium to charge in line with one’s overall objectives.

Price composition for bullion products

When bullion markets are experiencing normal demand, about 80% to 95% of silver bullion’s price discovery is comprised of the current spot price.

For gold, spot prices comprise approximately 95% to 98% of gold bullion’s overall price discovery.

Posted with permission of Visual Capitalist.

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