Have you ever wondered how do bullion dealers come up with the price of your physical gold bar? Is it true that bullion dealers make a lot of profits? Today, we look at the breakdown of a gold bar and why it is important to get a value deal instead of a cheap deal.
Essentially, the basic 101 formula is this:
Price = Physical Premiums + Spot price
Precious Metals Investors know that when they buy physical gold, they must pay a markup known as a physical premium.
For instance, on our GSC website, an Argor Heraeus Cast Gold Bar 100g is selling at S$8050.00 with the spot price of S$2450.80/oz. This translates to a physical premium of S$170.50 for the bar now.
This physical premium includes all the various costs components incurred in the minting of the gold bar. Some of these components include, but not exclusive:
- Refinery Minting costs
- Logistics Costs for delivery
- Insurance Costs
- Storage Costs
- Profit Markup
We covered this in a previous article also:
You can see in the above example, it is inaccurate to say that the bullion dealer earns $170.50 from selling the Argor Heraeus Cast Gold Bar 100g. The bullion dealer incurs costs when it decides to bring in inventory stock from refineries and typically the local SEA market competition is very stiff. It is not far-fetched to say that for a 100g gold bar retailing at S$8000+, the dealer could only be making S$10+ from it.
However, it is accurate to say that the retail investor’s “additional” costs of owning the physical bar is $170.50. It is an unavoidable cost incurred for the eliminating the counterparty risks and having the additional security of the physical asset. (We will discuss this in greater details in another article. PM us for more details!)
This is commonly known as the price of gold which may be bought and sold at this moment. What determines the spot gold price? The simplest answer is demand and supply of the market participants. However, there are many alternate theories about it which we will not delve into. We must note that the spot gold price differs slightly from region to region for many practical reasons, considering the geographical location and the time lag.
So, why should I not want my bar to be cheaper?
The more appropriate question here would be “What’s the opportunity costs I have to forgo here?”
Just imagine this, a dealer who is solely focused on “a race to 0” as we affectionately term it, is likely not going to be focused on value adding to its customers. Its main goal would be to try and attract as many customers as possible by virtue of its “lowest prices possible” strategy and hope to attain enough market share to be a dominant player. We know that does not work in the bullion industry, as seen from the numerous players initially making a big entrance in the precious metals industry with “low premiums inventories”, only to shut down shortly after with huge losses.
Price should not be your only comparison.
Instead, you should be looking for a dealer who is not only price competitive, but also able to value add to your portfolio investments! We’ve spoken on the importance of having an expert to guide you in your precious metals holdings in this article here (All Precious Metals investors fall into 2 categories. Which are you?)
Personally, I would absolutely be willing to top up the extra $10 in premium costs if in the long run, the dealer is able to value add to my portfolio. The costs savings would be much more than the $10 I put up now. Think of it as a minor investment in ensuring you get a better deal rather than a cheaper one. As Warren Buffett says:
“Price is what you pay. Value is what you get.”
And I would choose value over price anytime of the day.
Till the next time.