Premiums on Gold Coins
Understanding premiums on Gold coins is important before you go to buy Gold. Have you ever noticed that two bullion coins which contain the exact same amount of the same precious metal, can sometimes sell for a different price? For example, at the time of this writing, the spot price of gold is $1,306.80 per ounce. Yet, numerous dealers quote a selling price of $1,378 for the one-ounce American Gold Eagle, $1,356 for the one-ounce Canadian Gold Maple Leaf, and $1,355 for the one-ounce South African Gold Krugerrand.
Why might this be? After all, each contains exactly one ounce of gold. Should not an ounce of the same precious metal, like shares of the same company stock, always have one price at any given time?
Certainly, it seems like it should be that simple, but with precious metal bullion coins, it is not. The fact is that an ounce of a given precious metal – be it gold, silver, or platinum – can, for a variety of reasons, cost either more or less than another ounce of the same metal in the same market.
How can this happen? Where does the additional cost for these gold coins come from in the first place, and why do the amounts paid for the Gold Eagle, Maple Leaf and Krugerrand all differ, even though each contains the same amount of gold? Well, it’s all about a pricing thing called “coin premiums”.
A ‘coin premium’ is the additional cost of a bullion coin above and beyond the market value of the precious metal commodity it contains. For example, with gold at a spot price of $1,306.80 as mentioned above, an investor can expect to pay a premium of $71 over the gold price to buy the one-ounce American Gold Eagle. On the other hand, at the same spot price, an investor will pay only a $49 premium for a one-ounce Gold Maple Leaf, and only a $48 premium for the one-ounce Gold Krugerrand.
In general, this additional cost over the spot price for any bullion coin stems from a number of factors, including the manufacturing, distribution, and administration costs incurred by the mint or refiner in making the coin, plus a “mark-up” representing the cost of sale and the profit for the wholesaler selling the coin to a retail dealer. The retail dealer, in turn, will also “mark-up” its wholesale price of the coin to cover its own sales costs and realize a small profit when selling the coin into the investor market.
This series of incremental price increases applied to the coin as it passes through the distribution chain is a typical market mechanism present in virtually every other industry in existence, from food to auto parts, and houseplants to sporting goods.
And, just as market forces of supply and demand largely determine the value at which all goods and services can be sold in their respective markets, the level of a given coin’s availability (supply) versus its popularity (demand) also directly influences the prices at which different coins will sell for in the market place, even though they may contain the same amount of the same metal!
In fact, in some unusual market conditions, the available supply of a given coin, when balanced against its market demand at any given time, can have a pronounced impact on the coin’s premium. Unusual demand for a specific coin type can drive its premium level significantly higher than that of very similar coins in certain circumstances.
And as always, it is best to seek the advice of a reputable and trusted bullion dealer concerning any aspect of precious metals investing. You can also read our “Gold and Silver Facts” article to better equip yourself on current product premiums.
