It has been a busy week, you didn’t have much time to look at your Precious Metals (PM) investments during the week. Now that it is coming to the weekend, you decide to purchase some LBMA Good Delivery gold bars as prices having been dipping throughout the week.
BOOM. Wrong move there. You might have been better off waiting for Monday. To understand why, we first must understand the price components of a gold bar and why weekday prices are different from weekend prices.
If you are unfamiliar with the below equation, get familiar with it first!
Price = Physical Premiums + Spot price
(For more information, refer to “Cheaper a bit can a not?” Why your gold bar should NOT be cheaper.“ Article)
“Wise and successful businesses properly manage risks.”
For GoldSilver Central, we adopt a Hedging-based model approach where we ensure that we are not exposed to price fluctuations on our clients’ orders. This approach allows us to serve our clients without any prejudice on prices and ensures that we are not adversely affected by massive rise/drop in prices. To put things in perspective, a $200 increase in gold price will not equate a $200 increase in profits for selling a gold bar, as we do not take any positions on the gold spot price.
Under normal market conditions, where there is deep liquidity available and market participants aren’t afraid to quote prices for buying/selling, the difference between the selling price and buyback price (Also known as the buy-sell spread) is narrow. This is a natural function of efficient markets, where conditions for performing transactions are very fluid and has less or no friction. This is what usually transpires on a weekday where many market participants are available, and dealers are active also.
However, on a weekend, this is not the case. Market participants are inactive and do not quote prices. Hence a bullion dealer who deals on the weekends will instead, take the trade onto their own books. This creates exposure and a higher risk for the business itself, come Monday when markets are once again open. To deal with this increased risk, the buy-sell spread is widened to account for any possible fluctuations between the current quotes and the Monday market prices. This widening could be reflected in either the physical premiums or the spot prices itself.
A fun fact: Never try to compare prices of brokerages on a weekend. The adjustment of the buy-sell spread differs for each brokerage and you will end up with an inaccurate comparison.
How is the buy-sell spread determined on the weekends?
Reputable bullion dealers will have their own price risk assessment and structure. They consider several factors, such as the current market volatility, and price accordingly. Hence, you may observe that the buy-sell spread for the weekends may differ for different products.
This is also why some bullion dealers do not take in large orders on the weekend, as this increases their risks to an unacceptable level.
This sounds so unfair! Why should there be a wider buy-sell spread?
It is not a question of “fair / unfair”. Rather a more appropriate question to ask yourself should be “am I willing to deal at the current quoted rates?” Reputable bullion dealers widen the buy-sell spread to account for the increase in risks that they undertake. If they do not, they expose themselves to unacceptable risks and may even go out of business if the risk is not managed properly. However, if a dealer widens the buy-sell spread too widely compared to others, savvy investors know not to take it up and the dealer effectively prices himself out of the market. GSC offers services such as GSC Live! and price alerts/limits that assist our clients to monitor their desired price levels.
So why transact on the weekends?
It depends on your objectives!
If you are a regular investor and are now in the accumulation phase of your investments, you may wish to avoid placing weekend trades to avoid any major fluctuations in your accumulation. Slow and steady as some call it.
However, if you are a gun-slinging sniper looking for short-term opportunities from minor movements in price, and you foresee that prices are poised for a big movement come Monday, then yes transact on the weekends and lock in those prices. There are also investors who see that the current weekend prices meet their desired levels and are happy to sell at these levels. There is nothing wrong in that too.
Ultimately, GSC’s role is provide liquidity to our customers at fair and transparent rates. We also have value added services such as GSC Live! that make it easier for clients to achieve their objectives. The choice to transact or not, has and always will be the client’s to decide.
Till the next time, have a good weekend.