When Buying Precious Metals — Premiums Matter or: All that Glitters is Sold
Commentary on Precious Metals Prepared for CoinWeek.com by Patrick A. Heller….
At a non-financial conference over the weekend, another attendee asked me what my company’s formula was to sell the 1-Ounce Gold American Eagles. After I told him, he responded that the company he had been buying precious metals from was pricing them about $3 lower per coin than my company did. Therefore, in this person’s mind, he thought he was getting a good deal by dealing with this competitor, a company that is one of the largest retailers of physical precious metals in the US.
In my mind, though, the other dealer was not giving this customer good service. As a result, he would probably realize lower profits on his precious metals transactions from dealing with the competitor instead of with my company or another dealer with a “customers come first” approach.
Huh? How could they charge a slightly lower price than my company for Gold American Eagles but not provide as much value to the customer?
The answer is that the customer may well be purchasing the wrong physical gold product. When serving customers, it is important for the dealer to understand what their customers are trying to accomplish by purchasing bullion-priced gold and silver coins or ingots. This knowledge can help identify the most suitable items.
In my conversations with thousands of customers over the decades, the most common goal of those buying bullion-priced precious metals was for long term protection (insurance) against the risk of a falling US dollar. It seems like over half the customers state their intention to never sell their purchases, with their heirs receiving their holdings.
Almost always the long-term trend is for bullion premiums to decline. Over the past several decades, we have seen this occur multiple times. When enough of a particular bullion-priced coin has been sold to investors, there develops a secondary supply coming from investors who are liquidating. If enough of these are being sold on a regular basis, coin dealers and wholesalers drop their bids (and selling prices) relative to metal value. That is why investors looking to get the most gold for their money seek gold issues available at lower premiums. Examples of such pieces are the Austria 100 Coronas, Mexico 50 Pesos, and the US American Arts Medallions.
In the long run, I expect that most of today’s widely traded bullion-priced products will be bought back by dealers and wholesalers for about the same price relative to spot. If the market is such that a lot of these coins are being melted down, the pure issues will be worth slightly more than the alloyed ones. On the other hand, should gold and silver coins be used in everyday commerce, the alloyed pieces, with greater durability, could be worth slightly more per ounce than the pure coins.
My company, as well as a number of other coin and precious metals dealers, serves customers by offering them popular bullion-priced products at lower premiums. In the example at the beginning of this article, that customer who thought he was getting a good deal by purchasing 1-Ounce Gold American Eagles at a price $3.00 lower than my company charged might have been better off acquiring the US 1- and ½- Ounce Gold American Arts Medallions from my company at a price that was $33.00 per ounce less than we charge for American Eagles. After all, if you are likely to be paid the same price for both when it comes time to sell them down the road, those who opt for the Medallions will achieve better results than those who purchase the Eagles. Even if the owner has to unexpectedly sell them in the short-term, the buy/sell percentage spread is nearly identical for both.
It is typical in my store that first-time customers inquire about the availability of the bullion coins that they have heard about (Gold and Silver Eagles, Maple Leafs, and so forth). Almost always, that is what they acquire in their first purchase. But, once we have explained the advantage of purchasing lower premium products, a high percentage decide that is how they want to go for subsequent transactions.
Patrick A. Heller was honored with the American Numismatic Association’s 2012 Harry J. Forman Numismatic Dealer of the Year Award. He owns Liberty Coin Service in Lansing, Michigan and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects. His award-winning radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com. He is also the financier and executive producer of the movie “Alongside Night”.