Precious Metal Premiums – The Price of Peace of Mind
We receive quite a few questions about precious metal premiums. Whether you buy gold, silver, or platinum, you are likely to pay a premium over spot. What exactly is a precious metal premium? And why do bullion collectors need to pay them when they purchase precious metal coins, bars, or rounds?
We’ve created today’s guide to teach consumers everything they need to know about precious metal premiums. In this article, we will cover the reason why you pay a premium on bullion products, some of the advantages to paying a premium over spot price, and a few things to look out for as you attempt to balance a good deal with security by paying a premium on your gold, silver, or platinum products.
‘Spot price’ is a term used to refer to the price that a given asset is worth. For gold, silver, and other precious metals, this value can fluctuate pretty wildly over time. Spot price is frequently quoted in ounces. If the spot price of gold is $1,855, for example, then this means that one ounce of pure gold should be worth about $1,855. However, bullion buyers know that this is not the actual price you should expect to pay for an ounce of silver. Most orders will total at least a little bit more than $1,855/ounce. The difference between spot and total price for an order can actually be quite a lot.
If you plan to purchase gold or silver frequently, it is imperative that you understand how precious metal premiums work. Put simply, premiums help to cover additional costs associated with manufacturing, refining, or distributing precious metals to consumers.
Premiums often get a bad rap within the bullion community. Many investors resent the fact that they’re forced to pay an additional markup on their gold, silver, or platinum bullion products. After all, that money could very well be used to purchase more precious metals, if it weren’t for the premiums added to every order. The reality, however, is that physical precious metal premiums can also serve a set of very important functions for investors.
Stressed out about the additional premium price tacked onto the top of your precious metal order? Keep reading to learn everything that a wise bullion investor should know about physical precious metal premiums.
What Are Precious Metal Premiums?
‘Premium over spot’ is a term most often used to describe precious metal premiums, but the concept is not unique to the bullion industry. If you buy a cup of coffee, for example, you aren’t actually paying the market price for the commodity of coffee beans. You are paying for the coffee beans, but you’re also paying the cost of transporting, refining, and turning the beans into a delicious cup of coffee. Some companies are able to cut these costs down, which means that the ‘premium’ you pay per cup of coffee is low. Other companies put quite a bit of work into their refinement process to make the coffee as delicious and nourishing as possible. If you purchase from these latter companies, you might pay a higher premium over the ‘spot-price’ of coffee. However, you’ll also be able to obtain a more valuable cup of coffee.
This is somewhat true for the precious metal premium paradigm as well. Certain coins are more difficult to produce and might therefore come with a higher premium cost over spot. Certain bullion distributors are able to offer a lower premium than others, while some companies charge an additional premium price in order to bring consumers the purest, most impressively designed gold and silver coins they possibly can.
We consider a physical precious metal premium to be a price paid for peace of mind. By paying a slightly higher premium on a gold coin, bar, or round, you can guarantee that you’re securing a coin that has been expertly produced using state-of-the-art minting technology. While paying a lower premium might save you money in the short term, these gains might be diminished in the long term, when the lower quality of the coin’s refinement process results in depreciating value over time or otherwise retaining less of its premium.
What Affects Precious Metal Premiums?
Several factors influence how much of a premium you might pay on physical gold or silver products. Market demand, cost of production, and the efficiency of a coin’s manufacturer are all important parts of the equation as we determine how much of a premium to tack onto the spot-price value of a gold or silver coin.
Below, you’ll find a brief overview of some of the main factors used to come up with the physical precious metal premium over spot that you can expect to pay on a given product:
- Mint Efficiency. Coins from a smaller mint generally cost more money, because they come with a higher premium over spot price. The spot price for an ounce of gold or silver will not change from mint to mint; this price is determined by market demand and will apply to bullion across all distributors. But premium over spot can change significantly from mint to mint. Large mints, such as the Royal Canadian Mint, are equipped with efficient minting facilities and technologies. This means that it’s cheaper for these mints to create a given coin. Less efficient mints, like smaller distributors working privately in minimalist facilities, can’t afford to lose money on production – so they charge a higher premium cost to consumers.
- Supply and Demand. Supply and demand influence both the spot price of precious metals and the gold and silver premiums you pay on coins, bars, or rounds. It’s easy to see how high demand or low supply might influence the spot price of gold or silver, but its effects on premium costs are a bit more complicated. Distributors who are competing in a market with low supply and high demand often need to increase premium costs in order to retain profitability.
- Time of Year. Strangely enough, the time of year when you choose to buy bullion might also influence how much of a premium you pay per product. During summer months, gold and silver prices tend to be relatively stable. In order to account for these lower and more consistent prices, bullion distributors often decrease precious metal premiums in order to remain competitive. During the winter, prices are more volatile. This means that sellers might want to charge higher physical gold and silver premiums to keep profitable.
- Economic Circumstances. This factor can get a bit complicated, but it nevertheless closely influences the premium price you pay for gold and silver products. If the global market is struggling, people often want to buy physical gold and silver in order to hedge against inflation. This increases demand, which leads to the premium spikes we outlined above.
This isn’t the end of the story of how gold and silver premiums are determined. A number of factors contribute to the small premium price you pay for gold, silver, or platinum products. Some are clear, while others are more complicated.
How Expensive are Silver and Gold Premiums?
The physical gold and silver premiums you pay can range greatly, depending on the factors explained in the above section. Some gold and silver distributors charge large premiums in order to maintain profitability, while others are able to offer lower premiums over spot. You will generally pay a higher premium on silver coins than gold coins. For example, the Canadian Silver Maple Leaf averages around 16% premiums, while the American Gold Eagle is far cheaper at 4% premium on average.
Reputable gold and silver distributors should list their precious metal premiums clearly. Transparency is important; Hero Bullion always lists premium prices on a given product’s page so that consumers know exactly how much of a precious metal premium over spot they are going to pay.
Smaller distributors are likely to charge a higher premium than larger bullion dealers. Buying gold from a pawn shop or other tiny seller often means paying a significantly higher premium over spot than you’d pay while doing business with a much larger company. This is frequently the case, although new distributors may offer a discounted premium over spot in order to entice customers and secure a larger portion of a fleeting precious metal market share.
Before buying a precious metal, be sure to shop around. This should give you a better idea of the gold and silver premiums you might have to pay for a coin, bar, or round. You should also note that different product types come with different premiums. Gold bars, for example, offer some of the lowest average precious metal premiums in the industry. This is primarily because these products are easier (and therefore cheaper) to manufacture than gold coins or rounds.
Are Precious Metal Premiums Good?
Physical gold and silver premiums are an additional price you pay for peace of mind. When you purchase any commodity, you’re buying more than just the asset itself. Think back to the cup of coffee example we used earlier. You could certainly purchase a cheap cup of coffee from a gas station, where you’ll pay little more than the price of coffee, the commodity, itself. But buying a more expensive cup of coffee from a chain like Starbucks might be worth it. After all, you’re paying for the reputation of the company, the quality of the manufacturing process, and the experience of doing business with an industry leader.
The same is true with physical gold and silver premiums. Paying a little extra premium to do business with a respected company can go a long way. Hero Bullion’s premiums, for example, help to pay for industry-leading shipping techniques that completely eliminate the risk of having a coin arrive damaged or chipped. Paying a larger premium can also help you to secure gold or silver in a time of high demand for the commodity. After all, companies must secure profits – even when the supply for silver or gold is low and demand is high.
What are precious metal premiums? We consider them to be the price you pay for peace of mind. Gold and silver are valuable commodities that vary greatly in their cost of production and quality. Why purchase a poorly minted gold round for a low spot price when you could pay a little bit more for a coin that is more likely to appreciate in value and collectability over time? Furthermore, commodity spot prices are decided by highly volatile markets electronically traded and the premium for the physical markets can be thought of as the luxury cost for physically holding your precious metals. As mentioned earlier, rarely will you find the physical commodity for the traded market price.
When it comes to gold and silver premium tolerance, there’s really no one right answer. Each investor must make their own choice about how much of a premium they are willing to pay to purchase the perfect gold, silver, or platinum bullion product.
Final Thoughts: A Premium Over spot
Guides to buying gold and silver often list premiums as one of the big disadvantages to purchasing bullion products. We consider this to be a misconception. While premiums do cut into the amount of gold or silver you can purchase for your money, they certainly do some with their upsides. Premiums help to guarantee that you can physically secure the highest quality products available on the bullion market.
When it comes to gold and silver premiums charged by bullion distributors, the most important practice is transparency. We recommend only doing business with companies that are up-front and honest about their premium costs. Hero Bullion is aware that precious metal premiums can be difficult to understand when purchasing gold or silver products. We always list premium costs clearly on each of our product pages.
Is premium over spot a disadvantage or a valuable asset that provides peace of mind to bullion buyers? Is paying any premium worth it knowing it’s the cost of business to get physical bullion in hand? Ultimately, these are questions you’ll have to answer for yourself. All bullion collectors should be aware of the factors that influence premium prices, as well as the function of premium over spot as an important bullion market indicator.
About The Author
Jake HaugenFollow @herobullion
Hero Bullion provides an environment that is informative and safe for those looking to own physical gold and silver bullion as an investment. We love helping folks at all stages throughout their bullion journey making progress towards acheiving their financial goals. Whether you are a seasoned bullion investor or brand new to the game of gold and silver bullion ownership, we're here to help and serve you in any way we can.