The phrase ‘market liquidity’ would often pop up when discussing the fluctuating prices of tradable commodities, especially when we talk about gold. But what exactly is ‘market liquidity’, and how is it determined?
GOLD MARKET LIQUIDITY – WHAT IS MARKET LIQUIDITY?
To put it simply, it refers to how fast and easy it is for an asset to be bought and sold at stable prices. A good example of a liquid market would be when the price a buyer would offer for a commodity (or the bid price) is fairly close to the price a seller is willing to accept (the ask price).
So if people are buying and selling a commodity at reasonably set prices, thus having a faster buy/sell rate, then the market is liquid. If the supply exceeds the demand however, or if people are willing to sacrifice unrealized gains for the sake of selling off a commodity to minimise their losses, then the market is illiquid. This has a lot to do with what we call ‘spread’
GOLD MARKET LIQUIDITY – WHAT IS SPREAD?
As with any form of investment, it is important to understand how spread works. As a general rule of thumb, the higher the spread = the more expensive a commodity or product will become, and vice versa.
Higher denomination (bullion kilobars, etc) = lower spread = lower premiums = more cost effective
Lower denomination (bullion coins, etc) = higher spread = higher premiums = less cost effective
The first thing you would ask is, ‘why do higher denomination bullion products have lower premiums?’. For that, we have to consider manufacturing costs. Think about it, which would be easier to produce – 1 piece of 1kg bullion bar, or 1,000 pieces of 1g coins?
Due to the added minting and workmanship costs, along with operational costs which include utilities, packaging, shipping, insurance and so on, most bullion dealers and manufacturers will include a higher premium on their lower denomination products to cover their profit margin.
To tie the concept of spread back to market liquidity, it is safe to assume that the higher denomination bullion market is seen as more liquid than the lower denomination market.
Of course in reality, most of us might not be able to fork out a large enough sum to invest in higher denomination bullion. So is it possible to improve the liquidity for the lower denomination market?
GOLD MARKET LIQUIDITY – THE GOLD MARKET IN MALAYSIA
Currently, as much as 5.2 tonnes of gold, worth USD 221 million are being traded in Malaysia.
The gold market itself can be divided into 6 key segments; the physical professional market (e.g. Bullion banks), gold accounts (e.g. Maybank, CIMB), gold mining stocks (e.g. AEM, Barrick), gold backed securities (e.g. ETF), gold futures (e.g. COMEX, Bursa Malaysia), and the physical retail market (e.g. APMEX, NUBEX) which we will be focusing on.
So how do we ensure high liquidity and low spread within this targeted market segment?
That was the question we needed to answer. And we believe we may have provided a solution, by introducing the Nubex Exchange platform.
By capitalising on 9 years worth of experience in the online bullion retail business, and accumulating a wide network of registered users (13,000 and growing) with solid purchasing power, we are able to provide a platform that can help encourage a faster buyback rate, especially for lower denomination precious metals products.
Users are able to sell at prices of their own choosing to recover or preserve their premium costs, while at the same time, buyers will be able to enjoy much lower prices as the sellers would still need to compete with one another in offering the best possible price.
Thus, by encouraging a healthy, thriving marketplace, all within a well-secured environment with strict grading and authentication processes, we are able to improve liquidity for the local bullion retail market.
To see what precious metals products are available on the Exchange, click here.
To start selling your precious metals products, sign up or login here.