Did you know that when buying precious metals, you pay more than the actual market value of the bullion? Why pay prices above that of the spot rate? The answer lies in precious metal premiums.
What Exactly Is a Premium?
Premiums are fees added to the market value of an asset to cover expenses from the production and distribution processes. Turning unrefined precious metals into easily purchased bullion requires many steps resulting in additional costs. These expenses may include fabrication, distribution, storage, administration, and dealer fees.
Let’s consider an example. When you shop for sneakers, the sticker price does not only account for the expense of the raw materials. In addition to the cost of the materials, the sale price covers the costs of manufacturing, distribution, labor, overhead, and any other charges incurred along the way. Precious metal premiums work similarly.
Besides adjusting prices for production costs as described above, precious metal premiums fluctuate depending on market and purchasing conditions.
The type and volume of bullion purchased play a part in determining the premium. Typically, larger transactions result in lower premiums per ounce as the costs are more dispersed. Minting bigger forms of bullion, such as bars, generally costs less than minting smaller shapes, like coins. Because of this, the premiums for heavier forms of bullion run at a lower rate per ounce.
During times of economic uncertainty or as a result of a large-scale crisis, people turn to physical precious metals for financial security. This increase in demand correlates to a spike in premium rates.
In addition, supply levels significantly influence premiums. Two gold coins may each contain one ounce of gold; however, one of the coins displays a rare design. Because of its low supply, the rare coin draws a much higher price than its more common counterpart, even though the gold in both coins measures one ounce.
At a glance, premiums seem like an easy way for bullion dealers to increase their profits. Although taking a closer look, you see that precious metal premiums account for many factors, leading to fairly priced bullion. If you want to learn more about premiums, our article, Premiums on Gold Coins, elaborates on the topic.
