How are Silver and Gold Bullion Premiums Calculated?
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How are Silver and Gold Bullion Premiums Calculated?

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How are Silver and Gold Bullion Premiums Calculated?

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.

Economic Conditions

Depending on their size and significance, market events can affect bullion premiums local to global stages.

Examples:

  • 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.

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Energy

The Periodic Table of Commodity Returns (2012-2021)

Energy fuels led the way as commodity prices surged in 2021, with only precious metals providing negative returns.

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commodity returns 2021 preview

The Periodic Table of Commodity Returns (2022 Edition)

For investors, 2021 was a year in which nearly every asset class finished in the green, with commodities providing some of the best returns.

The S&P Goldman Sachs Commodity Index (GSCI) was the third best-performing asset class in 2021, returning 37.1% and beating out real estate and all major equity indices.

This graphic from U.S. Global Investors tracks individual commodity returns over the past decade, ranking them based on their individual performance each year.

Commodity Prices Surge in 2021

After a strong performance from commodities (metals especially) in the year prior, 2021 was all about energy commodities.

The top three performers for 2021 were energy fuels, with coal providing the single best annual return of any commodity over the past 10 years at 160.6%. According to U.S. Global Investors, coal was also the least volatile commodity of 2021, meaning investors had a smooth ride as the fossil fuel surged in price.

Commodity2021 Returns
Coal160.61%
Crude Oil55.01%
Gas46.91%
Aluminum42.18%
Zinc31.53%
Nickel26.14%
Copper25.70%
Corn22.57%
Wheat20.34%
Lead18.32%
Gold-3.64%
Platinum-9.64%
Silver-11.72%
Palladium-22.21%

Source: U.S. Global Investors

The only commodities in the red this year were precious metals, which failed to stay positive despite rising inflation across goods and asset prices. Gold and silver had returns of -3.6% and -11.7% respectively, with platinum returning -9.6% and palladium, the worst performing commodity of 2021, at -22.2%.

Aside from the precious metals, every other commodity managed double-digit positive returns, with four commodities (crude oil, coal, aluminum, and wheat) having their best single-year performances of the past decade.

Energy Commodities Outperform as the World Reopens

The partial resumption of travel and the reopening of businesses in 2021 were both powerful catalysts that fueled the price rise of energy commodities.

After crude oil’s dip into negative prices in April 2020, black gold had a strong comeback in 2021 as it returned 55.01% while being the most volatile commodity of the year.

Natural gas prices also rose significantly (46.91%), with the UK and Europe’s natural gas prices rising even more as supply constraints came up against the winter demand surge.

Energy commodity returns 2021

Despite being the second worst performer of 2020 with the clean energy transition on the horizon, coal was 2021’s best commodity.

High electricity demand saw coal return in style, especially in China which accounts for one-third of global coal consumption.

Base Metals Beat out Precious Metals

2021 was a tale of two metals, as precious metals and base metals had opposing returns.

Copper, nickel, zinc, aluminum, and lead, all essential for the clean energy transition, kept up last year’s positive returns as the EV batteries and renewable energy technologies caught investors’ attention.

Demand for these energy metals looks set to continue in 2022, with Tesla having already signed a $1.5 billion deal for 75,000 tonnes of nickel with Talon Metals.

Metals price performance 2021

On the other end of the spectrum, precious metals simply sunk like a rock last year.

Investors turned to equities, real estate, and even cryptocurrencies to preserve and grow their investments, rather than the traditionally favorable gold (-3.64%) and silver (-11.72%). Platinum and palladium also lagged behind other commodities, only returning -9.64% and -22.21% respectively.

Grains Bring Steady Gains

In a year of over and underperformers, grains kept up their steady track record and notched their fifth year in a row of positive returns.

Both corn and wheat provided double-digit returns, with corn reaching eight-year highs and wheat reaching prices not seen in over nine years. Overall, these two grains followed 2021’s trend of increasing food prices, as the UN Food and Agriculture Organization’s food price index reached a 10-year high, rising by 17.8% over the course of the year.

Grains price performance 2021

As inflation across commodities, assets, and consumer goods surged in 2021, investors will now be keeping a sharp eye for a pullback in 2022. We’ll have to wait and see whether or not the Fed’s plans to increase rates and taper asset purchases will manage to provide price stability in commodities.

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Mining

Visualizing the Scale and Composition of the Earth’s Crust

This animation shows the handful of minerals and elements that constitute the Earth’s crust.

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Visualizing the Scale and Composition of the Earth's Crust share

Visualizing the Scale and Composition of the Earth’s Crust

For as long as humans have been wandering the top of Earth’s crust, we’ve been fascinated with what’s inside.

And Earth’s composition has been vital for our advancement. From finding the right kinds of rocks to make tools, all the way to making efficient batteries and circuit boards, we rely on minerals in Earth’s crust to fuel innovation and technology.

This animation by Dr. James O’Donoghue, a planetary researcher at the Japan Aerospace Exploration Agency (JAXA) and NASA, is a visual comparison of Earth’s outer layers and their major constituents by mass.

What is the Composition of Earth’s Crust?

The combined mass of Earth’s surface water and crust, the stiff outermost layer of our planet, is less than half a percent of the total mass of the Earth.

There are over 90 elements found in Earth’s crust. But only a small handful make up the majority of rocks, minerals, soil, and water we interact with daily.

1. Silicon

Most abundant in the crust is silicon dioxide (SiO2), found in pure form as the mineral quartz. We use quartz in the manufacturing of glass, electronics, and abrasives.

Why is silicon dioxide so abundant? It can easily combine with other elements to form “silicates,” a group of minerals that make up over 90% of Earth’s crust.

Clay is one of the better-known silicates and micas are silicate minerals used in paints and cosmetics to make them sparkle and shimmer.

MineralMajor ElementsPercentage of Crust
Plagioclase FeldsparO, Si, Al, Ca, Na39%
Alkali FeldsparO, Si, Al, Na, K12%
QuartzO, Si12%
PyroxeneO, Si, Mg, Fe11%
AmphiboleO, Si, Mg, Fe5%
Non-silicatesVariable8%
MicasO, Si, Al, Mg, Fe, Ca, Na, K5%
Clay MineralsO, Si, Al, Mg, Fe, Ca, Na, K5%
Other SilicatesO, Si3%

2. Aluminum and Calcium

SiO2 bonds very easily with aluminum and calcium, our next most abundant constituents. Together with some sodium and potassium, they form feldspar, a mineral that makes up 41% of rocks on Earth’s surface.

While you may not have heard of feldspar, you use it every day; it’s an important ingredient in ceramics and it lowers the melting point of glass, making it cheaper and easier to produce screens, windows, and drinking glasses.

3. Iron and Magnesium

Iron and magnesium each make up just under 5% of the crust’s mass, but they combine with SiO2 and other elements to form pyroxenes and amphiboles. These two important mineral groups constitute around 16% of crustal rocks.

Maybe the best known of these minerals are the two varieties of jade, jadeite (pyroxene) and nephrite (amphibole). Jade minerals have been prized for their beauty for centuries, and are commonly used in counter-tops, construction, and landscaping.

Some asbestos minerals, now largely banned for their cancer-causing properties, belong to the amphibole mineral group. They were once in high demand for their insulating and fire-retardant properties and were even used in brake pads, cigarette filters, and as artificial snow.

4. Water

Surprisingly, even though it covers almost three quarters of Earth’s surface, water (H2O) makes up less than 5% of the crust’s mass. This is partly because water is significantly less dense than other crustal constituents, meaning it has less mass per volume.

Breaking Earth’s Crust Down by Element

Though there are many different components that form the Earth’s crust, all of the above notably include oxygen.

When breaking down the crust by element, oxygen is indeed the most abundant element at just under half the mass of Earth’s crust. It is followed by silicon, aluminum, iron, calcium, and sodium.

All other remaining elements make up just over 5% of the crust’s mass. But that small section includes all the metals and rare earth elements that we use in construction and technology, which is why discovering and economically extracting them is so crucial.

What Lies Below?

As the crust is only the outermost layer of Earth, there are other layers left to contemplate and discover. While we have never directly interacted with the Earth’s mantle or core, we do know quite a bit about their structure and composition thanks to seismic tomography.

The Upper Mantle

At a few specific spots on Earth, volcanic eruptions and earthquakes have been strong enough to expose pieces of the upper mantle, which are also made of mostly silicates.

The mineral olivine makes up about 55% of the upper mantle composition and causes its greenish color. Pyroxene comes in second at 35%, and calcium-rich feldspar and other calcium and aluminum silicates make up between 5–10%.

Going Even Deeper

Beyond the upper mantle, Earth’s composition is not as well known.

Deep-mantle minerals have only been found on Earth’s surface as components of extra-terrestrial meteorites and as part of diamonds brought up from the deep mantle.

One thing the lower mantle is thought to contain is the silicate mineral bridgmanite, at an abundance of up to 75%. Earth’s core, meanwhile, is believed to be made up of iron and nickel with small amounts of oxygen, silicon, and sulphur.

As technology improves, we will be able to discover more about the mineral and elemental makeup of the Earth and have an even better understanding of the place we all call home.

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