SPOT PRICE

The spot price is a number that approximates the value of gold. This is determined by the London Gold fix, which is where gold market insiders decide whether the spot price goes up or down. This is done behind closed doors twice a day and, because it features the heavy hitters in the industry, is considered the most accurate estimate of the open market gold price. This is based on whether more buying or more selling is going on, and at what volumes.

However, if you look around at gold coins and bars online, there’s something that stands out. The gold coin and bar always costs much more than its spot price in gold.

Why is this?

There’s a lot more that goes into the gold coin than the simple price of gold.

First, there are mining costs. There’s a lot of equipment that needs to be invested in. Many mines constantly face the threat of being shut down or nationalized by the government they are located in. Equipment can break down, things can go wrong. It is an immense undertaking of intricate complexity. It requires a lot of energy, special equipment, well trained people, and a friendly government. Thus the miners have to charge money for the price of gold.

Then, there is the refinement process.

Once again, products are required to refine gold from the natural ores into forms of higher purity. Skilled professionals with costly training perform the process. The refining process must also make profit, and thus this adds on more to the price of gold.

Then, there is the designing process.

Artists, usually groups or committees, must consider what portrait, symbols, numbers, letters, and numbers will be used and where they will go. This takes time and each person must be paid, which adds on a little more to the price of gold still.

After this, the coin or ingot must be minted.

An engraver is required. Machines, which require lots of capital, must be bought and maintained. Electricity costs money and labour must be paid to run the machines well. Once more, this all costs money, which they make by selling gold for slightly more than they bought it for. They’ve got to cover the costs and in doing so the price of gold rises still higher above the spot price.

Then, there is distribution from bulk buyers who sell wholesale all the way down to individual coins for sale. There are many nodes in this chain, all of which require money. There are storage costs and transportation costs. Security for the gold must be paid, websites funded and secured, gold trading markets must be operated, and on and on.

I think you understand the picture now. It’s a complex chain and each link needs to make money to operate and expand. Each member of this gauntlet of profit-skimming enterprises adds on to the price of gold coins, bars, jewellery, and more.

That’s why it costs a bit more money for gold coins and bars than the spot price.

However, there is one more very important reason. Physical gold and silver can actually, when demand spikes, go for far more than even the spot price of gold. This because the volume and intensity of buying in the small private gold markets, which usually deal with small coins and bars, can have vastly different supply and demand conditions than large bars.

Remember that the spot price is determined based on how large gold transactions are occurring. The big gold traders can trade in a completely different supply and demand environment than individual investors who purchase smaller coins and bars.

If enough buying takes place in the smaller markets, then the price of small coins and bars can actually increase dramatically above the spot price of gold. This is once more because of demand increasing without a commensurate increase in supply. This happened during 2007 and 2008 because of the panic spawned by the financial crisis. This has not yet happened considerably, at least as of this writing in late October, 2011, but I highly expect a similar thing to happen once the markets turn south and the global economic slowdown intensifies.

In fact, this is another huge opportunity for owners of gold and silver coins. If a similar wave of overbuying among the smaller coins takes place when the economy slows down, then there may be an opportunity.

If someone owned enough silver and gold coins before a buying wave took place, they would benefit not just from an increase in the spot price of gold and silver. They would also benefit because of the added premiums they could command during that time with people desperate to buy the limited supply of small gold coins and bars. This can happen because the spot price is linked to the huge bars traded by the London Gold Fix, not the small coins and bars that everyday people and investors own. As a result, the price of small coins and bars can diverge significantly.

Either way, the investment in gold and silver remains a highly undervalued opportunity. The limited supply of these coins and bars is running headfirst into a booming demand. The prices will shoot skyward when these happen.

If you’d like to learn more about the markets or view a wide selection of gold and silver coins and bars, Please view the BullionUK.com website.