Have you ever wondered why you have to pay a premium over spot on physical silver and gold? After all, to new investors, it seems only fair that someone should not have to pay more than the value in weight for precious metals. However, it’s important to recognize that many of the same market factors that apply to the gas you buy at the pump or the wood for that addition to your home also impact precious metals premiums.
Think about how much work it takes to turn crude oil into gas, or the steps involved with turning a tree into a stack of two-by-fours that are cut, processed and shipped to Home Depot. We accept the fact that premiums are being paid on those products, but balk at the thought of paying over spot price for precious metals.
The key in any situation, whether you are paying for a gallon of gas or a bar of gold bullion, is making sure you are being treated fairly. The best way to ensure you are paying a fair premium is to understand the current market conditions and arm yourself with the knowledge needed to protect yourself and your investments.
What is a Premium on Gold and Silver?
A premium is simply the price a customer pays over the spot value of a coin or bar. Spot price refers to the current market price on commodities like gold and silver and can fluctuate on a daily, hourly or even minute-by-minute basis. When you look at the spot price, what you are seeing is the rate in which precious metals are being traded based on their weight and metal content.
Whether a precious metals dealer is selling you coins, proofs or bullion bars, you can expect to pay a premium over spot price. This premium typically covers the cost of overhead such as fabrication, distribution and storage. However, premiums can also rise significantly based on a coin’s rarity. It’s not uncommon to see higher premiums on numismatic or highly collectable coins. So, two coins with the exact same metal content could have vastly different costs if one of those coins is highly collectable.
What Factors Influence Premiums on Gold and Silver?
Just like spot prices, premiums on gold and silver can also fluctuate based on market conditions. One key indicator you’ve already heard of is supply and demand. In a hot market, demand will drive the spot price up, as well as the premiums over spot.
While rising premiums might seem like a way for dealers to take advantage of the market to drive up their own profits (and some certainly do), it’s a little more complicated than that. When demand is high, the cost of precious metals goes up for dealers too. When you factor in the extra legwork and hours that go into finding, shipping and storing gold and silver in such a competitive environment, it becomes a little easier to understand why the premiums you pay rise in conjunction with demand.
It is also important to remember that spot price is a reflection of the value of raw, unrefined gold, silver, platinum and palladium. The process of minting, refining and authenticating physical coins and bars clearly adds an expense above the spot price, so the premiums will fluctuate based on the current cost of these processes.
Where Will You Find the Highest and Lowest Premiums Over Spot?
While it’s basically impossible to buy gold or silver at spot prices, you can invest based on which precious metals will have the lowest or highest premiums.
Premiums on Bullion Bars
Silver and gold bullion bars come in different weights and sizes. Creating these bars is less labor intensive than producing coins, so you can typically buy bullion bars for a smaller premium over spot.
Premiums on Coins
Gold coin premiums and silver coin premiums will have much more fluctuation, especially when you start to factor in collectability and rarity.
Proof coin premiums are almost always slightly higher because these coins represent the highest quality that a mint will produce. Proof coins are sold in limited numbers, are virtually flawless in design and are polished to a high shine. Also, they will come with official paperwork and leather or velvet cases for each coin. The higher premiums are often worth the cost for collectors and those looking to add precious metals to their IRA. Learn more about a Gold and Silver IRA.
Don’t expect to pay the same premiums on all gold and silver bullion coins. Demand is one of the prime factors that will lead to higher premiums on some bullion coins over others, even if the weight is exactly the same. For instance, gold and silver American Eagle Coins will fetch a higher premium than gold and silver Canadian Maple Leaf Coins. This comes down to the fact that the American Eagles are in higher demand.
Rare and Investment Grade Coins (Numismatics)
These coins carry some of the highest premiums based on their rarity and collectability. Numismatic refers to coins that hold value beyond the content of silver and gold. Their value could come from historical significance, unconventional minting processes, one-of-a-kind markings and a number of other factors that make numismatic coins highly desirable and valuable.
📚 Suggested Reading: Bullion vs. Numismatic Coins: What You Should Know Before Investing
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How Do You Know If You are Paying a Fair Premium Over Spot?
One of the most important steps you can take to make sure you are not overpaying for your premium is to know the current spot prices of gold, silver, platinum or palladium and how much you are willing to pay above that. If you are a collector and truly love the coin you are looking at, there’s nothing wrong with paying more for something that will add to your collection.
Remember, it’s unrealistic to think you can buy physical gold or silver coins and bars at spot price, so you’ll have to set your expectations based on what is happening in the market.
How to Minimize Your Costs on Premiums
If you’re primarily looking into precious metals as an investment, there’s no doubt you’ll want to manage your cost on premiums and maximize return potential. You can still make a good investment while paying fair premiums if you know what to look for and how to make your money go further.
Buy in Volume
Increasing your order size is a great way to manage your costs when it comes to paying a premium over spot for gold or silver. As mentioned earlier, bullion bars and many (but not all) bullion coins will have a smaller premium because the manufacturing and processing is not quite as extensive. Buying in larger quantities can help offset the cost you’re paying toward premiums so you’ll start seeing a return on your investment sooner.
Don’t Overpay for “Exclusive” Coins
There’s an alarming tactic some coin dealers and brokers are using to charge extraordinarily high premiums on exclusive Canadian bullion coins minted exclusively for them. While these coins may be less widely available and minted in small quantities, too many customers attempt to sell or invest their exclusive gold and silver coins to find they are only worth their weight in precious metal. Don’t overpay for such coins unless you really love it and want to add it to your collection because it could take years to offset the cost you paid in premiums.
Beware of Modern, Graded Bullion Coins
An increasing number of dealers are misleading investors into buying modern, graded bullion coins with the promise of greater returns. They’ll present recently-minted, Gold and Silver American Eagles and American gold Buffalos as rare, charging up to 10 times what the coins are actually worth! You may want to admire one of these coins as part of your collection, but don’t be fooled into thinking you’ll see a return on the huge premium dealers are charging.
To learn more, read: “Buyer Beware: The Truth about Modern, Graded Bullion Coins as Investments”
Always Speak With a Professional, Experienced Advisor
With so many coin dealers implementing new ways to charge higher and higher premiums, it is more important than ever to speak with an advisor before you buy. At Scottsdale Bullion & Coin, our precious metals advisors have the experience and industry knowledge to help you invest confidently and ensure you are paying a fair premium. Schedule an appointment today with an advisor who has your best interest in mind and will craft an investment strategy that works for you.Schedule an Appointment