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In the past few blogs you’ll have noticed that I focus on the
use of leasing. This is because this is what I have experience in. Central
banks and bullion banks look at The Perth Mint’s enabling legislation
(the Gold Corporation Act 1987) and particularly the Government Guarantee in
Section 22 and realise this means that the West
Australian Government is 100% on the hook for what the Mint does. As a result
of the Government’s AAA rating, they are happy to therefore extend
substantial credit limits to the Mint and therefore lend it precious metal.
With access to precious metal without the need for collateral or margin, the
Mint therefore has no need to use futures markets because they would cost
more, not just because of low lease rates but also because it is
operationally more efficient. As a result I have no practical experience in
the futures markets – the Mint has never traded futures nor has any
accounts with brokers in those markets – so I won’t go into them
in much detail except for theoretical discussions. Considering that much of
the gold commentary out there is US-centric and thus futures focused, I
don’t think I’d be adding anything of interest anyway. By
contrast, there isn’t much on leasing or the spot market or London,
which is what I do have experience in, so hopefully that is of interest.
Having got that out of the way, let’s talk about how trading works in a
bit more detail. In a prior blog I discussed the network nature of the gold
market and the use of Reuters as a bulletin board for prices. I think the
main lesson for anyone buying and hopefully selling back at a profit is that
the only way to get a good price is to have people you can play off each
other – a dealer isn’t going to give you a good price if they don’t
believe you have anyone else to go to. That’s how it works at the
wholesale end of the market, so it is the same at the retail end.
There is also one other rule/saying – get big or get out. By this I
mean your price depends upon the size of your trade. Size is also relative to
your dealer. For a small coin dealer a $10,000 deal may be big, for the Mint
for example it is ho hum. Of course, as with any business, if you are a
regular customer you can expect a better price than if the dealer thinks they
won’t see you again.
There are two ways you can get an idea of whether the price you are being
quoted is good or fair. One is to shop around and compare between dealers or
better still, have a live Reuters data feed, although that can cost thousands
a year. I can certainly tell you that if you have a fair amount to trade and
tell the dealer “well my Reuter’s screen says $x” and the
dealer can see that is the same price they see, once they know you have a
Reuter’s feed they know they won’t be able to jerk you around.
Having said that, if you are trading 10oz, then it won’t help because
that is too small – just knowing the price doesn’t mean you can
get it.
The second way is to ask for both their bid (buying back price) and ask
(selling price to you), but don’t indicate whether you are buying or
selling, otherwise they’ll just load up the price you need to deal at.
By getting the “spread” the dealer has nowhere to hide, if they
load up both sides you see that in a wide spread.
In the end though, all the above doesn’t matter if you don’t
really have anyone else you can or want to buy from or sell to. So many times
in my first job with the Mint in Sydney I’d have people come in, look
up at the screen and say “Perth Bullion Exchange (or Jaggards or whoever) down the road has a better price on
1oz Nugget coins”. Now they didn’t realise
that the spot price we used was set by the Treasury department in Perth and I
had no way or authority to change it, so couldn’t really get into
bargaining. I would just say “Oh well, best buy it from them,
then.” In almost all cases they’d just shuffle on the spot for a
bit and then buy from me anyway. It was all bluff.
Where you do have to be careful is if you are trading gold on an account
basis (that is, not taking physical and selling physical back) and this
covers allocated and not just unallocated or pool accounts. If you have gold
with someone, even if it is allocated, you really can only sell it back to
them without going into a lot of cost with taking delivery. With physical,
the dealer knows you can just take it to someone else a lot easier. By
accounts, I would include Perth Mint PMCP or PMDS, Kitco’s
pools, GoldMoney, Bullion Vault etc, anything where
you don’t hold it yourself and someone else is storing it for you.
In these situations, when choosing the “system” or service I
would suggest investigating the spread they operate at. When talking to them
about opening the account, ask for both their bid and ask prices over a few
days or telephone calls. It should be consistent. Compare this to the other
accounts you’re looking at. It probably doesn’t matter too much
if you’re not planning to do much trading, but it does give you a bit
of an insight into how they operate.
So what is the best price you can expect? At the bullion bank level, the true
market makers (or price makers) operate with a $0.50 spread but these are at
deal volumes of 1000oz or more ($1 million). However, even if you have a
million to get this price you also need to have an account with a bullion
bank – not easy to get, you really need to be a corporate entity with a
reasonable credit rating. And note that the $0.50 spread is for normal market
situations, it can widen when the market gets choppy.
Anyway, this gives you a benchmark against which to compare the prices you are
being quoted. The smaller you go below 1000oz, the wider the spread. Only way
to get a handle on it is to ring around or check out the prices quoted on
websites. Kitco is a good place to start –
they show both bid and ask for various products. For example, their pool
accounts had a bid/ask spread of $3.80 just now. Not too bad actually. The
spread really is your best friend as it shows what the real markup is.
Next week - understanding loco discounts. There is no such thing as a single
global gold price.
Bron Suchecki
Goldchat.blogspot.com
Bron Suchecki has worked in the precious metals
markets since 1994, when he joined the Perth Mint as an Administration
Officer in their Sydney retail outlet. In 1998 he moved to Perth to work in
the then fledgling Depository division. He has held a number of roles since
then in the treasury, risk and governance areas of the Mint.
All posts are Bron's personal opinion and not
endorsed by the Perth Mint in any way.
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