Infographics: How are Silver and Gold Bullion Premiums Calculated?

A neat infographics to show the basics of silver and gold bullion from the Visual Capitalist 

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 local to global stages.

Examples:

In a small town with only one brick and mortar coin shop, the dealer may boost their 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 1 oz of gold may have similar transaction costs as a 1000 oz 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 oz 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 are per oz.

It costs a mint far less to make one 100 oz silver bar, vs. 100 rounds of 1 oz 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 oz over spot for each Silver Eagle coin and +3% over spot for each Gold Eagle coin they strike and sell to the world’s bullion dealer network.

A private company like Sunshine Minting will sell their silver rounds and bars in bulk for less than ½ the premium most government mints will sell their products for.

BULLION SELLER’S OBJECTIVES

Whether the seller is a large bullion dealer or a private individual, they will almost always want to yield the highest ask price they can get for the bullion they are selling.

That said, just because one wants to receive a large premium on the bullion they are selling, that 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 its price too high, buyers will likely choose to go to a lower priced competitor.

If a dealer sets their price too low, they 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 80-95% of silver bullion’s price discovery is comprised of the current spot price.

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

Now for the above presented as infographic...

Courtesy of: Visual Capitalist and JMBullion

Quote of the Day: Golden Handcuffs

When the public had access to gold coins prior to 1914, individuals controlled banking policy. They also controlled government fiscal policy. They could take their coins out of commercial banks if they did not approve of government policy. This is why national governments annul or restrict gold-coin redeemability whenever a major war breaks out. They do not want to face the citizens' veto. 

With the repudiation of any gold-coin standard since 1914, citizens no longer understand the case for a gold-coin currency. They do not understand that widespread gold ownership was the number one restraining factor on the expansion of state power in the economy. The uncoordinated individual decisions of millions of people could overturn any government policy that required central bank inflation to fund it. The politicians resented this. So did the central bankers.

The politicians were under restraints: golden handcuffs. They decided that it was better to turn the money-creation power over to the bankers. The central bankers promised to buy government bonds at low rates: lender of last resort. This made the central bank the counterfeiter of last resort.

This is from author Gary North on the religion of inflationism-central planning versus free markets at the Mises.org.

More US States Seek New Gold and Silver Currencies

From the CNN,

A growing number of states are seeking shiny new currencies made of silver and gold.

Worried that the Federal Reserve and the U.S. dollar are on the brink of collapse, lawmakers from 13 states, including Minnesota, Tennessee, Iowa, South Carolina and Georgia, are seeking approval from their state governments to either issue their own alternative currency or explore it as an option. Just three years ago, only three states had similar proposals in place.

"In the event of hyperinflation, depression, or other economic calamity related to the breakdown of the Federal Reserve System ... the State's governmental finances and private economy will be thrown into chaos," said North Carolina Republican Representative Glen Bradley in a currency bill he introduced last year.

Unlike individual communities, which are allowed to create their own currency -- as long as it is easily distinguishable from U.S. dollars -- the Constitution bans states from printing their own paper money or issuing their own currency. But it allows the states to make "gold and silver Coin a Tender in Payment of Debts."

The world does not operate on a vacuum. People act based on purported ends, or that people responds to incentives shaped by perpetually changing conditions—impelled by the environments, the markets, political policies or social relationships or on a blend of these [certainly not based on mathematical variables and equations].

If national governments continue to relentlessly debauch their currencies, then people will seek refuge in alternative currencies that would preserve their hard earned savings.

The function of money can be seen even in the prison environment where in absence of conventional money, exchanges takes place through spontaneously designated commodity medium by the inhabitants (not authorities).

Returning coins to circulation have even reached mainstream US politics as 2 senators have introduced a bill that would replace dollar bills with coins.

And this aligns with the actions of 13 US states above, who seems to realize of the growing fat tail risks of inflationism.

Swelling grassroots recognition of such risks seems to prompt for noteworthy changes on the fringes of the mainstream political spectrum.

Perhaps we will reach a tipping point where the periphery transforms into the popular. And this should apply not only to the US but importantly to the world.

War on Commodities: Falling Prices Equals Ballooning Demand For Gold Coins

The implied price controls conducted by some the major governments have apparently been meant to forestall the rise of statistical inflation via the commodity transmission.

Yet instead of the markets freaking out of commodities, physical demand instead has reportedly been swelling.

From Bloomberg, (bold highlights mine)

Sales of gold coins are on track for the best month in a year amid the worst commodities rout since 2008, a sign that bullion’s longest bull market in nine decades has further to run, if history is a guide.

The U.S. Mint sold 85,000 ounces of American Eagle coins since May 1 as the Standard & Poor’s GSCI Index of 24 raw materials fell 9.9 percent. The last time sales reached that level, bullion rose 21 percent in the next year...

It’s not just the U.S. Mint that saw accelerating sales. Rand Refinery Ltd., which makes the Krugerrand, said May 13 that sales are heading for their best month since August. Demand for physical gold on May 6 was the strongest since early February, Standard Bank said in a report May 11. The U.S. Mint sold 62,000 ounces of American Eagles in the first week of May, as the S&P GSCI slumped 11 percent, the most since December 2008.

UBS AG, Switzerland’s biggest bank, had its second-best day this year for physical sales on May 9, according to a report the following day. The bank’s sales to India, the world’s top bullion consumer, are more than 10 percent higher than in 2010.

So like my earlier post on declining silver inventories, we seem to be witnessing markets taking advantage of the government orchestrated turmoil.

And this has not been an all the private sector affair; Emerging market governments have reportedly joined the frenzy to accumulate.

From the same Bloomberg article, (bold highlights mine)

Another warning sign for the rally may be central banks adding to their reserves for the first time in a generation. Mexico, Russia and Thailand bought about a combined $6 billion in February and March, International Monetary Fund data show. Central banks hold 30,575 tons, equal to about 18 percent of all the metal ever mined, the data show.

The banks were also boosting holdings in 1980 when gold rose to a then-record $850, only to fall for most of the next 20 years. That high is equal to $2,299 in inflation-adjusted terms, according to a calculator on the website of the Federal Reserve Bank of Minneapolis. Prices tripled from 1999 through the beginning of 2008 as the banks sold more than 4,000 tons.

It would seem that the current ploy implemented by the US could be benefiting emerging market economies. Has the rigging of the marketplace also been meant to give EM economies ‘friends’ a discount?

Needless to say, the effect of the price manipulation seems becoming more evident—a policy failure.