How are Silver and Gold Bullion Premiums Calculated?
The price paid for each ounce of bullion is composed of the metal’s spot price and the bullion premium.
Here’s the price composition of some common rounds:
- Silver Eagle: 80% spot price / 20% bullion premium
- Silver Canadian Maple Leaf: 84% spot price / 16% bullion premium
- Gold Eagle: 96% spot price / 4% bullion premium
How are these bullion premiums determined? How can bullion buyers take advantage of the lowest possible premiums?
Difference Between Spot Prices and Bullion Premiums
Spot Price: The current price per ounce exchanged on global commodity markets.
Bullion Premium: The additional price charged for a bullion product over its current spot price.
The calculation for bullion premiums depends on five key factors:
- The current bullion market supply and demand factors.
- Local, national, and global economic conditions.
- The volume of bullion offered or bid upon.
- The type of bullion products being sold.
- The bullion seller’s objectives.
Bullion Supply and Demand
The total amount of supply and demand of bullion is a major influence on bullion product premiums.
Bullion dealers are businesses, and they are actively trying to balance product inventory and profitability. Too much inventory means high costs. Too little inventory means angry customers. Fluctuations in the gold and silver markets affect bullion market supply, and this impacts premium prices.
For example, in the Western hemisphere during the summer, calmer price patterns mean the bullion supply tends to increase. Sellers mark down their prices to attract market share.
During other months, silver and gold prices tend to have more volatility. This leads to increased buying and selling, and bullion sellers react accordingly. Some may mark up prices to prevent running out of inventory, or to capture profits.
Depending on their size and significance, market events can affect bullion premiums local to global stages.
- In a small town with only one brick and mortar coin shop, the dealer may boost their premiums to guard against running out of inventory.
- In a country like Venezuela, where the local currency is losing value at an extreme rate, locals may opt to buy bullion to preserve their wealth. This means higher premiums.
- At a global level, in the event of a large crisis (similar to the 2008 Financial Crisis), it is likely premiums would increase significantly as demand spikes and options diminish.
Volumes Being Sold
Every seller incurs costs on each transaction such as time, overhead, or payment processing costs. For a seller, a single transaction for 1 oz of gold may have similar transaction costs as a 1000 oz transaction.
Therefore, transactions with higher volumes of bullion have their costs spread out. As a result, premiums tend to be higher on small volume purchases, and lower per oz on high volume buys.
Form of Bullion for Sale
As a general rule, the larger the piece of bullion is, the less the premium costs are per oz.
It costs a mint far less to make one 100 oz silver bar, vs. 100 rounds of 1 oz each.
There is also typically a significant difference in premiums between government and private mints.
For example the most popular bullion coins in the world are American Silver and Gold Eagle coins. The U.S. Mint charges a minimum of $2 oz over spot for each Silver Eagle coin and +3% over spot for each Gold Eagle coin they strike and sell to the world’s bullion dealer network.
A private company like Sunshine Minting will sell their silver rounds and bars in bulk for less than ½ the premium most government mints will sell their products for.
Bullion Seller’s Objectives
Whether the seller is a large bullion dealer or a private individual, they will almost always want to yield the highest ask price they can get for the bullion they are selling.
That said, just because one wants to receive a large premium on the bullion they are selling, that doesn’t necessarily mean the market’s demand or willing buyers will comply.
Dealers must consider these factors when setting premiums:
- Market share objectives
- Competitor strategies
- Price equilibrium strategy
If a dealer sets its price too high, buyers will likely choose to go to a lower priced competitor.
If a dealer sets their price too low, they could end up selling out of inventory without garnering enough profit margin to pay for the company’s overhead costs.
Dealers and sellers are both typically trying to find the price equilibrium “sweet spot” where the time required to complete a sale is minimized and the seller’s profit is maximized.
This is more difficult than it sounds, as there can be thousands of factors at play when establishing the best possible premium to charge in line with one’s overall objectives.
Price Composition for Bullion Products
When bullion markets are experiencing normal demand, about 80-95% of silver bullion’s price discovery is comprised of the current spot price.
For gold, spot prices approximately comprise of 95-98% of gold bullion’s overall price discovery.
Visualizing the New Era of Gold Mining
This infographic highlights the need for new gold mining projects and shows the next generation of America’s gold deposits.
Visualizing the New Era of Gold Mining
Between 2011 and 2020, the number of major gold discoveries fell by 70% relative to 2001-2010.
The lack of discoveries, alongside stagnating gold production, has cast a shadow of doubt on the future of gold supply.
This infographic sponsored by NOVAGOLD highlights the need for new gold mining projects with a focus on the company’s Donlin Gold project in Alaska.
The Current State of Gold Production
Between 2010 and 2019, gold production increased steadily, though this growth has stagnated over the past few years.
|Year||Gold Production, tonnes||YoY % Change|
Along with a small decrease in gold production in 2020, there were no new major gold discoveries in 2021.
The fall in production and long-term lack of gold discoveries point towards a possible imbalance in gold supply and demand. This calls for the introduction of new gold development projects that can fill the supply-demand gap in the future.
Sustaining Supply: Gold for the Future
Jurisdictions play an important role when looking for projects that could sustain gold production well into the future.
From political stability to trustworthy legal systems, the characteristics of a jurisdiction can make or break mining projects. Amid ongoing market uncertainty, political turmoil, and resource nationalism, projects in safe jurisdictions offer a better investment opportunity for investors and mining companies.
Today, 10 of the top 15 mining jurisdictions for investment are located in North America, according to the Fraser Institute report published in 2023.
A Golden Opportunity
Located in Alaska, one of the world’s safest mining jurisdictions, NOVAGOLD’s 50% owned Donlin Gold project has the highest average grade of gold among major development projects in the Americas. For every tonne of ore, Donlin Gold offers 2.24 grams of gold, which is more than twice the global average grade of 1.04g/t.
Additionally, Donlin Gold is the second-largest gold-focused development project in the Americas, with over 39 million ounces of gold in M&I resources inclusive of reserves.
NOVAGOLD is focused on the Donlin Gold project in equal partnership with Barrick Gold.
Learn more about Donlin Gold .
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