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.
GOLD
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 Krugerrand. 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.
SILVER: PRIVATE MINT
Private issue
mints offer a seemingly endless variety of products: from well-known rounds
like Sunshine, Silvertowne, and A-Mark, to the no-name brands minting everything from
Obama heads to bar mitzvah designs. If it weighs one troy ounce and its
purity is .999 or greater, anything silver falls into this category.
As mentioned
above, silver's average monthly spot price has been $14.51 over the past
seventeen months. The average premium for an order of 500 silver rounds has
been $1.87. The percentage of premium to total is 11.4%. This percentage
peaked in December of 2008 at 24% ($10.28 spot + $3.25 average premium) and
currently sits at 6.0% ($17.17 spot + $1.09 average premium).
CONCLUSION
Several
conclusions may be drawn from the data above:
- Gold offers the best premium to total cost
ratio. Following this ratio exclusively, gold is a more conservative
investment than silver. Similar to spot price movements, gold's premiums
fluctuate less dramatically than silver's, meaning one's investment is
less beholden to upward movements in spot price in order to realize
"profit."
- Silver's premiums fluctuate widely, spiking due
to supply constraints at the mints and dropping when demand eases. This
is especially true of government coins.
- The significant price difference in silver
premiums between government coins and privately minted rounds opens arbitrage
opportunities during large market disruptions, like in 2008.
If metals prices
fall under deflationary pressure, expect buyers to place demand pressure on
the markets - especially in silver - and the premiums to rise congruent with
2008 levels, especially with respect to government coins. Should
hyperinflation ensue - a scenario I deem less likely in the near term -
average buyers may be priced out of the market altogether.
'Til next time,
that's my Saab Story.
Tarek Saab
Guardian Commodities
Tarek Saab is the President of Guardian Commodities and a former finalist
on NBC's "The Apprentice" with Donald Trump. He is an international
speaker and syndicated author.
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