When you want to buy physical gold, you usually go to a bullion dealer. But at what price does he get his gold ?
Usually, when you decide to buy gold, you go to a bullion dealer. Above the spot price*, the premium* range can vary from 2 to 20% depending on the brands and the type or collection of your coins, ingots, or bars. This means that the bullion dealer makes two to twenty percent gross margin. Sometimes it could even be more. For instance, one client got a quote at USD1330 for a platinum coin of one ounce when the spot price was at USD850. The bullion dealer was looking for a 60% margin!
So, this is the price you pay as a client, but, behind the curtain, what is the price that the bullion dealer pays to acquire the product? Are the margins high? From where is the supply and which source of supply is the most profitable?
Since you may have many types of coins and bars, we will only focus on the international gold bars from refineries regulated by the LBMA organization (Valcambi, Argor-Heraeus, PAMP). The LBMA, London Bullion Market Association, is the official world authority regulating the gold and silver market from an investment perspective. For example, jewelry will not be associated and regulated as an investment by this Association. For palladium and platinum, the authority is LPPM, The London Platinum and Palladium Market.
To have an idea of the margins, here are the selling prices for some bullion dealers, as seen on their website for the date 22/02/19 for minted or cast bars:
BullionStar Singapore: spot +1.66% for gold (100gr)/ spot +9.41% for silver (1kg)
Suisse Gold, Switzerland: spot +3% for gold (100gr)/spot +9.96% for silver (1kg)
Gold Investment, UK: spot + 3.58% for gold (100gr)/spot + 6.12% for silver (1kg) +20% of VTA
Precious Metals sold by Bullions Dealer come mainly from 3 sources:
1 - Fresh Bars Directly from Refineries
Refineries are the first source for bullion dealers to get gold. LBMA gives a list of refineries with integrity processes and quality standards where you can buy gold. When you buy gold from these brands/refineries, you have a higher guarantee of the purity product and you can trade this bar on the international market. Each refinery has its own quotation.
Let’s take this example: a small order of USD 1 or 2 million (25kg to 50kg) from a bullion dealer, to a LBMA refinery for cast minted bar of 100gr. With a spot price around USD1220, the premium range will be about USD3.20/toz for the most expensive like MKS-PAMP to USD1.50/toz for the most competitive like Heraeus. In other words, bullion dealers buy at spot+0.14% to spot+0.30%.
In fact, bullion dealers pay more than these +0.15% to 0.30% premiums. As a matter of fact, refineries use their own spot prices and they are usually higher than the international spot price.
2 - Second Hand Gold and Recycled Gold
After the refineries, bullion dealers can get gold by buying back precious metals in the hands of random clients to sell it directly to new clients. We call these bars “second hand” and many of these bars pass from hand to hand. Usually bullions dealers buy back from clients under the spot price. It could start from spot -2% to spot -10% for some coins. If we follow our example of 100 grams bars, this means that the bullion dealer will sell you at spot +2 to 10% a bar he bought at spot -2 to -10%. Gold from recycled product (scraps, jewelry, electronic device) usually goes to a refinery to make fresh bars. In general, it costs to the bullion dealer around 10 to even 20% under the prices of gold to get scraps.
Others like Cash Converters in Europe will buy your gold jewelry for 50% less than the price of the gold.
3 - Discounted Gold
Often clients buying important amounts as an individual (50 kg) will ask to get discounted gold. For some people, discounted gold is like seeing a unicorn since many, many scams are involved in this type of transaction. Usually coming from Africa, sellers attract buyers with a promise to sell gold at a 30% discount. I personally flew to Africa to deal with them... do not waste your time or put your life in danger. It’s better to stay in Singapore. In a forthcoming article, I will share this experience along with details on how to avoid scams.
However, it’s possible to get gold with a 2 to 10% discount. The solution is to buy direct production from mines. Not shares but production. Large and well-known mines will not sell to bullion dealers. They sell directly to bank or governments. So, bullion dealers have to go to medium/small scale mines, but the risk is very high. If you are lucky enough to avoid all the scammers and find a serious mine agent, you will have to be solid enough to overcome obstacles and bear high risk.
As a matter of fact, bullion dealers first have to find mines that respect all the LBMA standards (no children working, no blood gold, chemical process…). Then, high risks are involved: They will have to pay the production upfront and wait to get delivery. They will face operational risk (closing of the mines), management risk (failure of the company), and fraud risk (trust in the company). Above all, the delay to get the gold is quite long (6 months to 1 year) and the amount delivered by the mine can be small (equivalent 1 to 5 million in USD). These are high risks that bullion dealers are not usually willing to take.
The question is: Can an individual client go directly to a refinery to get the gold?
The general answer is: No.
Refineries usually do not deal with individual clients. To avoid compliance hassle, they deal with companies.
If you settle a company?
It is a long process to open an account with refineries. Valcambi or Pamp can take 6 months to 1 year before giving approval. Compliance, KYC, and AML procedures are very painful and tedious since it’s a sensitive subject. Then, you have to put in minimum order of half a million per transaction and for a total of 5 to 10 million a year.
To better understanding, you can compare with banks. When you need credit, you don’t go directly to the central banks. You deal with commercial banks. It’s the same in the precious metal investment area. If you want gold, you will see bullion dealers (intermediaries) and the refinery will play the role of central banks.
In conclusion
There are the 3 main sources of gold from your bullion dealer. The most interesting source with lowest risk is the second hand/scrap gold. However, this is not the safest way for the client to buy gold. Next time you go to your bullion dealer beware of: premium vs spot price, the freshness of the bars, and at what price he will buy back your bar if needed.
*spot price refers to the international live gold price (XAU/USD)
*gold refer to most traded precious metals (gold, silver, platinum)
*premiums are the margin of the bullion dealer