What is the “gold premium” added to the gold spot price?
New gold investors are often wondering about the premium added to the gold spot price. Here you find detailed information about the top-up gold premiums and by what factors they are influenced.
The global gold spot market, like many other markets, is always open, except during the weekends. When the European markets start in the morning, the Asian markets are almost closing, and when the European markets come to an end in the afternoon, the US market opens, and so on. The market price of gold, as of any other commodity or goods, is mainly determined by supply and demand. These markets are called gold spot markets.
As global supply and demand continues 24 hours, except weekends, the gold price changes continuously, depending on the supply and demand of each geographical market.
The supply mainly consists of sales of gold owners such as investors, funds, central banks, insurance companies, private investors etc. Gold supply from production of refineries and scrap smelters plays a relatively small role. The production figures of mines, refineries and scrap smelters are rather a source of speculation than having a determining influence on the market.
The global spot market price of gold can be found online and live, provided by many sources. You will also find the global spot market price of gold on our website.
It is very important to understand what the global spot market price of gold stands for. The gold spot market is the market of the material of gold, without being in any specific physical form such as bars of various sizes or coins. The global gold spot market price is mainly used as a price basis for contracts such as gold future contracts or gold option contracts etc., where physical delivery is not the primary goal.
When a buyer wants to buy physical gold, taking delivery, then a so-called bullion premium is added to the gold spot market price. The bullion premium is simply called “premium” in the industry, or sometimes “mark-up” or “top-up”. The word bullion premium is a bit misleading, because it does not only apply to bullions (bars), but to coins as well.
When gold shall be delivered, it obviously needs to be in a physical form, mainly in form of bars but also coins. The production of bars or coins comes at a cost, and other costs like for transports, insurance, handling etc. must be covered as well. And then there is a profit margin of the seller that shall be covered.
All the above cost factors are covered by the premium, that a buyer of physical gold needs to pay to the seller, on top of the global gold spot market price.
Professional investors or buyers who buy gold, or silver, frequently, are often not talking about the gold price, which is determined by the global gold spot market anyway and does not leave any room for bargaining the price of fine gold. Instead, professional gold investors and gold buyers talk about the gold premium of a seller.
Gold spot price + Gold Premium = Gold Sales Price
The global gold spot market price is not the sales price of gold when a buyer buys gold. The sales price is always the global gold spot market price plus the premium.
There are certain rule-of-thumb standards for the premiums of bars of specific weights and for coins of specific provenience. Those premium standards may vary, depending on a number of factors, such as:
- The form and weight offered, such as bars or coins, and the different weights of bars;
- The volume of gold offered or requested;
- The current market supply and demand situation;
- Global and local economic conditions;
- The national market (country) where gold is bought, and
- The sellers’ own objectives.
Gold premiums – the influence of form and weight
Obviously, it costs a mint much more to produce 1.000 gold bars of one gram each than one gold bar of one kilogram. The same goes for the packing, transport and internal handling, banking fees etc.
For example, two or three employees going to the vault, transferring gold from own stocks to customer stocks, storing these customer stocks in boxes, sealing them, taking note of bar and seal numbers and entering them later into the stock software creates the same costs for ten bars of one kg each as for ten bars of 100 g each. But ten bars of one kg and ten bars of 100 g have a different value. Reflecting these costs to the price results in relatively lower premiums for larger bars and higher premiums for smaller bars or coins.
Although gold premiums may vary based on the factors listed above and explained below, there are some standards of gold premiums for general orientation:
Gold bars of 1 kg: 1,5 – 2,5%
Gold bars of 500 g: 2,5% (rarely demanded)
Gold bars of 250, around : 3% (rarely demanded)
Gold bars of 100 g: 3 – 5%
Gold bars of 50 g, around: 5% (rarely demanded)
Gold bars of 31,1 g (1 ounce): 6% (rarely demanded)
Various gold coins (1 ounce): 5 – 8%
These general rule-of-thumb standards may vary as per the quantity offered or demanded, as per the country where gold is bought, and other reasons mentioned above.
Gold premiums – the influence volume of gold offered or requested
The establishment of a gold seller has to cover certain fixed costs such as overhead costs and payment costs, as mentioned above. If those fixed costs can be spread to a larger amount, the seller can be more flexible with his premiums, still covering costs and realising profit.
The seller’s cost to sell and handle gold bars worth EUR 1,5 million are not six times of the costs selling gold bars worth EUR 250.000. Therefore, the premium for a sale of gold bars worth EUR 1,5 million is likely to be lower than for a sale of gold bars worth EUR 250.000.
Gold premiums – the influence market supply and demand
As with all goods, an over supply on the market drops the prices, and a shortage in supply, because of strong demand, increases the prices. When demand is low, compared with supplies, gold sellers may decrease their premiums in order to attract more buyers.
When demand is high, gold sellers may increase their premiums not only for the reason of increased appetite of buyers, but also to reduce their sales, safeguarding their own stocks in order to be able to meet many buyers’ requests, rather than being sold out within a short period and then watching their own empty vaults, waiting until new deliveries arrive.
While writing this article (December 2018), the delivery time of Swiss refineries is up to 6 to 8 weeks, due to the high demand in physical gold. In times of normal demand or low demand, the delivery time of Swiss refineries is typically 2 days to 1 week.
Gold markets, and silver markets as well, are generally calmer during the summer months, leading to a tendency of slightly lower premiums. When market activities pick up again, typically with the begin of the Indian wedding season in September, the increased volatility results in more buying and selling on the market, which is likely to increase premiums as well.
Gold premiums – the influence global and local economic conditions
Global and local (national) economic conditions are not only influencing the price of gold but, naturally, the premiums as well. The influence on the premium does not necessarily need to be in the same direction as the influence on gold prices. There might be a big demand for gold, which may increase the gold prices. But gold prices may reach or pass acceptance levels in a specific country, leading to difficulties for gold sellers in that country to sell. Consequently, the sellers in that country may drop their premiums.
In countries with a high inflation, like Turkey now, an increasing crowd is trusting gold more than fiat savings (money savings), to preserve their wealth, even if gold demand on a global level stagnates.
Global financial crises like the one caused by Lehman Brothers in 2008, demand in gold and silver increases tremendously, which is reflected to increased premiums as well.
Gold premiums – the influence of a sellers’ own objectives
An individual seller’s own objectives may have an influence on the gold premium, as mentioned above. A concern not to run out of inventory may lead to an increase of a seller’s gold premium. Excessive gold stocks may lead to a lower gold premium of a specific seller.
A seller entering a new market may offer discounted gold premiums to attract more potential buyers. The same typically applies when a seller wants to increase its market share, or to beat strategies of competitors.
Please note that the above information regarding gold premiums applies also to the premiums added to the global spot market prices of silver, platinum and palladium, with the exception that the standard rates are different.