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Spot Prices Are Falling, But Premiums Are on the Rise

Gold and silver premiums – the price dealers add to the melt value of an item to cover manufacturing and overhead – began climbing in the past two weeks.

Many clients see falling gold and silver spot prices as an opportunity to buy, but some are disappointed to find the premium for the item they want is suddenly higher, negating some of the price drop.

The challenge they face is that lots of other bargain hunters are trying to jump on the same opportunity.

Supply & Demand

Premiums are very sensitive to supply and demand in the retail market for finished coins, bars, and rounds, and the reasons are pretty straightforward.

First, when prices drop, retail bullion investors stop selling and start buying. That has a profound effect on the availability of resale, or secondary market, product inventory.

The large quantities coins, bars, and rounds coming back to market in the past year or two have driven premiums to the extraordinarily low levels we saw recently. Now, supply from the secondary market is drying up fast.

Second, there are only a few mints and refiners making coins, bars, and rounds. Like any manufacturer, they gear production to market demand. Scaling up takes a bit of time, and it isn’t something most will do without first developing some confidence that the higher demand will persist.

If prices stabilize or begin to rise and the wave of bargain hunting subsides, we’ll see pressure come back off of premiums. If spot prices fall further, or we see a spike in demand for some other reason, they will be pushed higher.

All that said, the rising premiums of the past two weeks have not overtaken the reduction in spot prices.

For now at least, buyers can capture most of the savings on spot prices on most products. They just can’t capture it all.

Retail buyers have wondered if dealers are simply raising prices to avoid taking a “loss” on falling value of their inventories.

We can’t speak for the practices of smaller or less experienced businesses, but as a larger national dealer with lots of volume, Money Metals Exchange uses prudent hedging strategies to insulate against big swings in gold and silver prices and to ensure we always have inventory available for sale at fair prices.

On the other hand, many less sophisticated online dealers and particularly local coins shops do not hedge their inventory – choosing to introduce risk and distortive forces into their business models.

More than anything else, though, the main driver behind premiums on coins, bars, and rounds is the forces of supply and demand described above.

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