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What is the cheapest way to buy gold?

March 12, 2014 0 Comments

When it comes to buying gold, customers are regularly confused why they can’t purchase a gold coin or bar for the spot price. The common misconception is that the spot price of gold is just like the price of a stock; you can buy 1 share at the listed price. What people don’t realize is that the spot price is the price of the raw commodity, before it is turned into the finished product (in this case a gold bar, coin or round).

The Backyard Gold Prospector

When customers call us confused about why gold coins are more than the spot price, the most frequent example we give them is what we call “The Backyard Gold Prospector.” We tell them that if they were to go purchase some mining equipment, dig in their backyard and happen to come across one ounce of gold, that gold nugget they unearthed would be worth the spot price of gold. Now, if they want to turn that nugget into something more recognizable, like a coin or a bar they’d need to hop in their car and drive down to the refinery. There they’d have to pay to have the gold refined. Once that was finished, they’d have to hop in their car again and take the refined metal over to the minting facility. There, they would have to pay the mint to stamp their metal into a coin or a bar. After that they’d have to take their stamped bar or coin over to the assayer to verify the purity and content of their coin or bar. Most times we don’t make it through the entire scenario before the customer realizes that paying a couple percent on top of the spot price isn’t unreasonable.

Now that we’ve got that out of the way, what IS the cheapest way to buy gold?

The three most popular forms that gold bullion is sold in are coins, rounds, and bars. In the industry, we refer to the price of a gold coin in the amount over spot it is. So we may say a coin is “5% over spot” or “$30 dollars over.” For the sake of uniformity we’ll just focus on the percentage over spot.

Gold Coins

Gold coins are going to be the most expensive way to purchase an ounce of gold. Much of this cost is in the fact that you are buying your coin from a government and most coins carry a face value. For example, a 1 ounce American Gold Eagle has a face value of $50 dollars. This means that in the worst case scenario you can sell that Gold Eagle back to the U.S. Mint for $50 dollars. More than likely that will not happen since the price of gold is currently at $1,367.00. But with a gold coin’s higher premium, you are also paying for pedigree. In the case of a 1 ounce Canadian Gold Maple Leaf you’re getting an ounce of gold that is backed by the Canadian Government. The coin is easily recognizable, has a design by famed artist Walter Ott, has a face value of $50 dollars and has been in production since 1979.

Gold coins are generally 3-5% over spot. Quantity dependent.

Gold Rounds

Gold rounds would be the middle of the pack in terms of the cheapest way to buy gold. In the simplest terms, a gold round is a gold coin that is made by a private manufacturer, not a government. Because there is no government involved, gold rounds do not carry a face value backed by a stable, legitimate country. The main reason gold rounds aren’t the cheapest way to purchase gold is because they just aren’t that popular so private mints don’t sell enough rounds to drive the price lower. This has nothing to do with their quality. It just ends up being an aesthetic preference in customers.

Gold rounds are between 2.6% to 3% over spot. Quantity dependent.

Gold Bars

Gold bars are the cheapest way to purchase gold coins. They are also a regular investment vehicle that are traded daily (most common is the 400 oz Comex Bar). And the most important differentiating feature is that there are a lot of sizes. With coins and rounds there are normally only 4 options (1/10th oz, 1/4 oz, 1/2 oz and 1 oz). But with gold bars there are a myriad of options because they are broken down in denominations of ounces or grams. Not only are their many sizes but there are many more private mints making gold bars than there are rounds and coins manufacturers combined. Because of this fierce competition the prices end up being driven down to very small profit margins, e.g., cheaper prices for the end customer. Some gold bars even forgo a design stamped in to keep the prices even lower.

Gold bars are between 1.35% to 2.5% over spot. Quantity dependent.

Quantity Discounts

Something else to consider is that the quantity of gold you purchase directly affects how cheap you can get it. Basically, the more gold you buy at one time, the cheaper you’ll get it. It’s a basic concept, but many customers ask why that is. On an oversimplified level, think about the person stamping one 100 oz. gold bar versus stamping 400 1/4 oz. gold bars (both contain 100 ounces). The person manning the press will have the 100 oz. gold bar finished in a few minutes. To stamp 400 bars it’s going to take him 400% more time. Compounded on top of the hourly labor rate, the press has to run more, drawing more electricity. More plastic is used for the packaging. More time is taken to pack up the product. You can see how the costs add up, and this was the simplified version. Because of this, larger gold bars will always carry a lower premium than smaller gold bars.

The same applies to the dealers selling you the gold. When they purchase their gold bars to sell to the public, the supplier will give them cheaper pricing on larger orders. It’s the same principle passed down the line to the consumer.

So, if you really want to buy the cheapest gold product, buy a 400 oz. gold Comex bar. It’s not even 1% over spot. 😉

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