For Inquiring Minds -- How to Decipher Bullion Prices
As expected, Fed officials elected to delay tapering during last week's FOMC meeting. But they also raised the possibility of reducing stimulus sometime in the next few months, and that triggered selling in the precious metals futures markets on Thursday heading into week's end.
Prices are mixed this morning as trading for the new week commences. There is no certainty in the markets about just how long Quantitative Easing will continue, and metals prices, which showed strength leading up to the late October Fed meeting, fell back into the ranges where they have been trading in recent weeks. Each metal basically gave back the gains from the prior week.
Traders appear concerned that the days of loose monetary policy could be drawing to an end, despite strong evidence to the contrary. Consider:
- Ultra-dovish Janet Yellen, a Berkeley socialist who believes passionately in redistribution of wealth, is set to take the reins as Fed Chair in January.
- Congress will once again battle over the budget and debt ceiling in December and January.
- Official inflation rates remain below the target of 2% while economic data shows underlying weakness, especially in workforce participation.
- The US dollar index weakened during the run-up to last week's FOMC meeting, but rallied back above the key level of 80 in the aftermath.
It looks to us like the Fed has plenty of excuses to stay the course on stimulus. We think the odds we see tapering any time in the near future are diminishing. We may even see an acceleration in QE in the coming months.
Evaluating Bid/Ask Spreads
Bullion buyers like the chances for their precious metals investment to generate outsized returns over time. Once the critical decision to buy metals is made, the best strategy for maximizing investment returns is to keep transaction costs low. The best way to evaluate transaction costs when it comes to physical bullion is focus on the "bid/ask spread." Regular readers will know this is something we often discuss.
To recap for newer readers, the buy, or "ask," premium primarily consists of premiums and minting charges dealers pay to acquire inventory as well as the dealer's profit. All coins, rounds, and bars carry a premium and it will vary based on quantity and item. Government-issue bullion coins tend to carry a bit higher premiums than privately minted rounds and bars -- largely because governments are not efficient and incur higher costs. But those government-issue bullion coins will also bring a higher premium when the investor is ready to sell them back. This is why investors should consider the cost of buying an item today and the premium or discount for selling it back tomorrow – assuming no change in the underlying spot market price of the metal. The spread is the complete picture of "round-trip" transaction costs. Below you will find tables showing the current bid/ask spreads for the most popular gold and silver products:
The most competitive dealers publish both buy and sell premiums so you can calculate the current spread. You'll find the Money Metals Exchange buy prices on the same product page as the sell prices -- we publish them live! If you have a good handle on both prices and keep the spread low, you'll get the most from your investment.
Potential Market-Moving News This Week
- Thursday, Nov. 7th – GDP. Investors will get the first look at 3rd quarter GDP growth. The consensus is for 1.8% GDP growth. Even this heavily manipulated number is well below the target promised by DC politicians and bankers when selling the various economic stimulus initiatives to voters.
- Friday, Nov. 8th – Employment Situation. The key jobs report for October is due out late in the week and indications are that it may disappoint. Last week's private sector jobs report from ADP missed expectations.
- Friday, Nov. 8th – Personal Income and Outlays. Inflation has generally been outpacing income growth and squeezing household budgets. Equity market bulls generally ignore this long-term problem and focus on personal spending – any growth in spending is viewed as good – regardless of whether it is supported by higher income.