A Hard Look at Gold, Silver Premiums

Lost in the daily commentary about gold and silver prices is the actual cost of taking possession of these precious metals. Unless you trade in paper GLD or SLV, or you store your bullion in overseas vaults with companies like Goldmoney, the actual cost to purchase gold and silver can diverge from the COMEX spot price by as much as 36%.

GOLD
For the purposes of this study, we have included only the most popular gold coins: the one ounce (by gold weight) US Mint Eagles, Royal Canadian Mint Maple Leafs, and the grandfather of them all, the South African Krugerrand. Over the past seventeen months, gold's average spot price has been $975.15, and its average premium per ounce for an order of twenty ounces has been $58.18. The percentage of premium to total (again, defined as 'spot' plus 'premium') is 5.6%. This percentage peaked in November of 2008 at 9.4% ($760.86 spot + $79 average premium) and currently sits at 4.2% ($1,119.85 spot + $49 average premium).

SILVER
Silver prices vary considerably by marking. Private mints producing silver "rounds" compete for market share with government mints producing silver "coins." Additionally, the popularity of larger forms of silver such as 100 oz and 1,000 oz bars causes the silver market to vary more widely than the gold market.

We have focused specifically on the premiums for one ounce coins, and the chart below highlights the two most popular government coins: the US Mint Eagles and Royal Canadian Mint Maple Leafs.

Over the past seventeen months, silver's average monthly spot price has been $14.51, while the average premium for an order of 500 ounces of government coins has been $3.53. The percentage of premium to total is 19.5%. This percentage peaked in December of 2008 at a whopping 36.8% ($10.28 spot + $5.99 average premium) and currently sits at 12.9% ($17.17 spot + $2.55 average premium).

CONCLUSION
Several conclusions may be drawn from the data above:

-Gold offers the best premium to total cost ratio. Following this ratio exclusively, gold is a more conservative investment than silver. Similar to spot price movements, gold's premiums fluctuate less dramatically than silver's, meaning one's investment is less beholden to upward movements in spot price in order to realize "profit."

-Silver's premiums fluctuate widely, spiking due to supply constraints at the mints and dropping when demand eases. This is especially true of government coins.

-If metals prices fall under deflationary pressure, expect buyers to place demand pressure on the markets - especially in silver - and the premiums to rise congruent with 2008 levels, especially with respect to government coins. Should hyperinflation ensue - a scenario I deem less likely in the near term - average buyers may be priced out of the market altogether.