Buy/Sell Formulas for Gold and Silver
August 27, 2020
By Patrick A. Heller
A frequent question I am asked is what kind of buy/sell formulas for gold and silver my company might use if prices soar far above their current levels. An implicit question that is part of that is whether people would even be able to sell their precious metals at all.
Most, but not all, coin dealers are seek to make a profit margin, whether buying or selling. That means that they are willing to purchase items from the public at a price less than they can sell it on the wholesale market (the bid side of the wholesale market minus shipping costs and the cost of tying up funds). Sometimes they may be willing to pay a relatively stronger price if they have a solid retail prospect to sell the coins or currency. Similarly, most dealers price their merchandise to sell at a price slightly higher than what it would cost them to replace it wholesale (the ask side of the wholesale market, including what might have to be paid to have product shipped).
By structuring their business model to make a profit no matter whether buying or selling, dealers have an incentive to continue this two-way activity.
That is the general concept. In quiet markets, the wholesale buy/sell spread tends to be much narrower than it is during volatile markets.
Let’s take U.S. 90 percent silver coins for an example. Bullion wholesalers right now are running buy/sell spreads of 4-5 percent, where their wholesale buying price is 95-96 percent of their wholesale ask price. The company where I work trades a significant volume of this product with retail customers in both directions. Most of the time over the years, our buy price to purchase $1,000 face value of U.S. 90 percent silver coins from the public has been from 88 percent to 92 percent of our retail selling price. Currently, it is about 90 percent of our retail selling price. Dealers who buy and sell smaller volumes of U.S. 90 percent silver coins typically operate on wider buy/sell spreads with the public.
However, the relative tightness of this buy/sell spread does not apply when prices are extremely volatile. Perhaps the best example of the difference that makes is looking at the boom gold and silver market that peaked in January 1980.
One concept to understand is that the term “spot price” refers to the price at which commodity futures contracts trade for the current (on the spot) month. In theory, a party desiring to acquire 5,000 ounces of pure silver in the form of five 1,000 ounces .999 fine bars need only purchase a COMEX spot month contract (if in the U.S.) and request delivery. In this situation, the buyer pays the spot price for the silver plus the broker’s commission, insurance and delivery costs.
In order to sell at the spot price, a party would need to own five 1,000-ounce .999 fine bars already stored as registered inventory in COMEX vaults. The party selling it would receive the spot price less the broker’s commission and any insurance and shipping costs.
Silver in any other form other than these 1,000-ounce bars already stored in COMEX vaults are not necessarily worth “spot price.” At the peak silver spot price around $50 in January 1980, the refineries were taking in so much silver coins, flatware, holloware, other-sized ingots, jewelry and industrial products that they simply weren’t able to process newly arriving silver for at least six months. Thus, when the refineries received silver to melt down, refine and fabricate into 1,000-ounce bars that could be delivered to COMEX vaults, they had to look at what prices were for futures contracts in the time delay when they could actually deliver the new bars.
But, six to seven months in the future, physical silver would be in plentiful supply. As a consequence, when the COMEX silver spot month price was about $50, the six months future prices peaked at about $35. Thus, refineries were only willing to pay less than $35 per ounce for incoming silver. Because of market volatility and having to tie up their cash for half a year, their bids actually were well below the $35 level.
At the January 1980 peak, the company I would later own and now work for, paid retail customers a peak of about $25 per ounce for $1,000 face value bags of U.S. 90 percent silver coins. The company’s retail selling price then was about $35 per ounce. Yes, that was a 30 percent discount to the “spot price” at the time, but it reflected commodity market prices six months in the future.
At that time, because of huge price volatility, the company was paying retail customers a little over 70 percent of its current retail selling prices for $1,000 of U.S. 90 percent silver coins.
If the world were to experience a rise in the silver spot price of $1 per month until it reached $50 per ounce two years from now, dealer and wholesaler buy/sell spreads would tend to be relatively tight close to the COMEX spot price. If, instead, the price of silver started jumping $5 per week until it reached $50, you can just about be guaranteed that wholesalers and dealers would be buying and selling the silver metal at a significant discount to the COMEX “spot price.” They would also operate on wider buy/sell spreads.
The gold market, because of its far higher value per ounce, will not likely have as wide buy/sell spreads or experience any or only lesser discounts to the COMEX spot price as silver in a market where prices are soaring. That is because shipping and handling costs for $50,000 of gold are a fraction of what it would cost to deliver $50,000 of silver.