Those venturing into the world of gold and silver bullion trade for the first time might be unfamiliar with the concepts of “premium” and “spot price”. What exactly are they and how will it affect the price of gold and silver products? Let us take a closer look at what it really means when we talk about the premium and spot price of gold and silver products.
PREMIUM AND SPOT PRICE OF GOLD AND SILVER PRODUCTS – WHAT ARE THEY?
As a globally traded commodity, the prices of gold and silver fluctuate according to various conditions and circumstances (which will get into later). As such, the ‘spot price’ simply refers to the current asking price per ounce of gold and silver that are being traded on the global market.
What about premiums then? Well, continuing from the idea that all sellers will refer to the spot price to set their pricing, premiums are the additional charges a seller would incorporate into the pricing of their products, usually in order to cover their profit margin.
In short, the two terms can be simplified as such;
spot price = current asking price on the market
premium = additional charge incorporated in the final price to cover profit margin
PREMIUM AND SPOT PRICE OF GOLD AND SILVER PRODUCTS – HOW PREMIUMS ARE SET
Generally speaking, the bigger the denomination of the gold or silver products being sold, the smaller the premium. This makes perfect sense from a manufacturer or dealer’s standpoint – every transaction done by a seller will incur costs no matter what. This includes time and labour spent on minting, producing, packaging, operational and overhead costs, as well as processing the payment itself, and transportation and insurance costs. Theoretically a seller would incur the same costs whether they are selling a 1oz silver coin or a 1 silver kilobar.
With that in mind, high volume purchases would allow a better spread of the costs as opposed to smaller amounts, which is why premiums are set much lower for higher denomination gold and silver products and vice versa. Put it this way, if you were in the manufacturer’s shoes, would it be easier for you to make a single 1 kilo gold bullion bar, or a thousand pieces of 1g gold minted bars?
Having said that, the calculation of premium and spot price of gold and silver products will also be determined by other key factors as well. Apart from the volume and type of products being sold, gold and silver prices will also be determined, like other globally traded commodities, by its supply and demand, as well as the present economic climate (be it local, national or globally).
PREMIUM AND SPOT PRICE OF GOLD AND SILVER PRODUCTS – EXPECTATIONS OF BUYERS AND SELLERS
Now that we have a better picture of premium and spot price of gold and silver products, how will it affect you as a seller or buyer? Well, it all goes back to using the spot price as a reference point. As a seller, the idea is to usually sell above spot, to cover your profit margin, or to reclaim premium costs if you’re reselling. Of course, as a buyer, you’d want the opposite, to buy either on or below the spot price when possible.
Currently in most retail transactions (be it through dealers, jewelry stores, pawn shops, etc), the premium and spot price of gold and silver products situation is in favour of the seller side, while the buyers are often forced to bear inflated premium costs.
PREMIUM AND SPOT PRICE OF GOLD AND SILVER PRODUCTS – A POTENTIAL SOLUTION
The idea of having the premium and spot price of gold and silver products is to regulate product prices on the market. However, due to the differing expectations of the buyer and seller during the transaction, it is currently difficult for them to reach a price discovery in which both parties will leave fully satisfied.
This is where we come in. Nubex has developed and recently released its beta version of the Nubex Exchange – a platform whereby buyers and sellers can have direct transactions with one another for a better price discovery. With a wide base of registered users with solid purchasing power, sellers will always have a customer base to tap into to sell their gold and silver products, and set their own price accordingly.
Likewise, with a wide base of sellers on the platform, buyers will also be able to enjoy much lower prices compared to traditional bullion retail channels, as sellers will need to compete with one another to offer the best price possible to push out their inventory faster.
Along with a secured payment system in place, mandatory authentication and grading processing for every item on the platform, as well as payment and shipping/pickup options, the Exchange will become a much needed game changer for the retail bullion market in Malaysia and beyond.