Both parties benefit in silver sale
October 18, 2018
In a free market, when a transaction occurs, both parties expect that what they receive will exceed their subjective valuation of what they give up. When a consumer buys a loaf of bread, he or she values the bread more than the funds used to pay for it.
At the same time, the business selling the bread values the payment received more than the bread traded away. This is the secret of a free market in that both parties to a transaction subjectively expect to benefit from it (but you must understand that some of the benefits may not be financial).
This reality is not understood by many people. To some, if a business makes a profit when selling goods and services, someone else must suffer an offsetting loss. That explains why some people are uncomfortable with the concept of seeking a profit as being fair.
As it is in the rest of the markets, voluntary transactions involving numismatic and precious metals items occur when both the buyer and seller expect they will benefit from the transaction. However, even if cash is the only consideration in such an exchange, both parties can still end up making a profit out of the same transaction.
The reason that is possible is that the dealer and the collector are working on different time frames. If a dealer sells a Morgan dollar for $50, he can make a profit if his short-term replacement cost is some amount lower than $50 (note that how much or how little the dealer paid for the actual item sold is irrelevant – replacement cost is the accurate reflection of financial profit or loss).
The collector buying this coin can also make a cash profit by holding it for longer than the short term. If he or she later sells it to another party, perhaps even the same dealer from whom it was purchased, for $60 (ignoring inflation and the time value of money), a profit is also realized by the collector.
Of course, replacement costs can rise for the dealer having made the original sale, or the value of the item may decline once the collector buys it. But the important point is that at the time of the original transaction, both parties valued what they received more than what they traded away.
Periodically in my business, a potential new customer will ask, “If I buy this from you and the price goes up five times, how do I know that you will be willing to buy it back from me?”
To this I explain that my business’ buying and selling structure is to purchase from the public at prices somewhat below what items could be immediately liquidated for on the wholesale market and to offer them for retail sale at prices somewhat higher than what the wholesale replacement cost would be.
When I say that I would be willing to buy it back, no matter the price level, because my business would be making a profit doing so, they instantly understand that my business has a strong incentive to buy back the exact same merchandise we previously had sold.