Bullion Pricing – How It Works

So, you’ve made the decision that it’s time to add gold and/or silver bullion to your investment portfolio. Now it’s time to understand how the price of your coins and bars is calculated.

Spot Price & Futures Price

​There are two benchmarks for precious metals – spot prices and futures prices. These prices are determined by ‘over-the-counter’ markets and ‘futures exchanges’. 

HOW ARE SPOT PRICES DETERMINED?

There are two key markets in which the prices of gold and silver are determined.

1. Over-the-Counter (OTC)
The OTC market consists of traders dealing with other traders on a one-on-one basis. It operates much like the internet – it is just a network of traders independently dealing with each other 24 hours a day. OTC is generally meant to refer to professional/corporate entities trading 400oz gold bars (and 1000oz silver bars), usually for settlement in London. However, when you buy a coin from a bullion dealer, you are also doing an OTC deal.

OTC trading is done on the telephone or via a dealer's proprietary trading platform software. Just like your transaction with a coin dealer, the amount dealt and the spot price agreed is not public.

To facilitate price discovery in what is an otherwise opaque market, precious metal dealers often use a service like Reuters or Bloomberg as an indicator of where the spot price is. This spot price is updated by the bullion desks of the big banks and is, in effect, a bulletin board or forum where these banks can publish their prices. However, unlike a stock market, it is not a commitment to deal at those prices (but generally one can).

It is therefore hard to "pin down" the OTC spot price, compared to a public exchange.

2. Futures Exchanges
Futures markets are public, regulated exchanges where the price for delivery of gold or silver at various dates into the future is traded. The largest and most influential market is the US COMEX market.

Often the current (or nearest) future prices quoted as a spot price of physical gold. Technically this is not correct as it is a price for gold or silver to settle in the future whereas the "spot price" is the price for immediate settlement. However, in countries with futures exchanges dealers often base their price for immediate delivery of gold or silver off their local futures market, so from a retail customer's point of view a futures prices is effectively the spot price.

It is important to note that futures and spot prices are related to each other and as such are kept in alignment by arbitrage traders who look at the relative costs of borrowing cash and gold (and other factors) and will sell futures and buy OTC spot (or vice versa) if they see too much divergence between the prices.

There has been some debate as to whether US futures markets or the London OTC spot markets drive the price. The analysis concludes that it is not fixed and changes over time, even though the London OTC market is much larger than COMEX in terms of ounces traded.

A Bullion Dealer's Spot Price

So how do bullion dealers selling to customer set their spot price? They do so by considering the following factors into account:

• The spot/futures price may change in the time between committing to a price with their customer and executing a deal with their OTC counterparty or futures market broker.
• OTC and futures markets are wholesale markets (trading in "lots" of 1,000oz and 100oz of gold, respectively) whereas a dealer's retail customers will be buying in much smaller amounts. This means it may take some time before they have accumulated enough ounces to execute a deal, during which the OTC/futures price will change.
• The dealer may not be quoted the Reuters or Bloomberg screen price when trying to lock in a price in the OTC market, especially when the market is moving quickly and bullion banks are not updating their prices into those information services quickly enough.
• For futures trading, the dealer will be charged brokerage fees. For both futures and OTC trading there is also general costs of employing dealers and settling trades.

The way bullion dealers manage the above factors is to add a margin (or buffer) to the spot or futures price they see quoted. How much they add and how often they will change their spot prices depends on how volatile the wholesale price is and how much buying or selling their clients are doing. This changes dynamically during the day and will also vary between each bullion dealer. Note that this spot price margin is in addition to any fabrication premium.

The result is that you will find each bullion dealer quoting different spot prices. This can be confusing to first time investors who are used to, for example, a single price for a company's stock on a single exchange. It often leads to questions about whether they are being quoted a "fair" price.
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The only way to know if you are getting a fair price is to do what bullion dealers themselves have to do, which is to shop around and see who is offering the best price at that time and take it. In doing so, you become part of the huge, opaque precious metal market “network” of over-the-counter traders

Even though Spot Price & Futures Price tend to be reported on TV and radio news, spot and futures prices are unavailable to retail buyers of gold and silver bullion coins and bars.

Retail price

​When setting the price of bullion for retail investors, the seller takes into account these international benchmarks. Our calculations include a ‘premium’ over the metal price to cover the cost of fabrication of raw gold into coins and bars. To ensure we have a viable business, the Mint’s premium also includes a profit margin.

There are a couple of general rules worth knowing about premiums.

They are lower on bullion cast bars because the fabrication process is fairly straightforward. Bullion coins, which offer a number of important benefits including legal tender status, greater divisibility, rarity and detailed designs, are more complex to fabricate. As a result, the premium paid is slightly higher.

Notice, however, that premiums per ounce are usually lower on larger coins. You’ll also be able to discount the premium per ounce by taking advantage of volume breaks.

Live price

Taking their lead from international benchmarks, retail prices of gold and silver bullion fluctuate during the course of the day. To reflect this, our advertised prices are constantly updated.
   
When placing an order for bullion on the Mint’s bullion website, you have one minute to lock-in the ‘live’ price of gold or silver before it is automatically revised – either up, down or no change.

Local currency

The price of gold and silver bullion is also directly affected by the relationship between the U.S. and Australian dollars.

This is because precious metals are U.S. dollar denominated commodities. But for the convenience of local customers, The Australia market prices its bullion in Australian dollars.

So if the Australian dollar strengthens relative to the U.S. dollar, the local price of bullion will fall. Conversely, if the value of the Australian dollar weakens relative to the U.S. dollar, the local price of bullion will rise.
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The Australian dollar last hit parity with the U.S. dollar in 2013, negating this effect. More recently, the Aussie’s value has declined somewhat, explaining why the price of gold in Australian dollars has remained strong.

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​Precious Metal Worldwide-Investors Wanted

Our Europe-based Precious Metal Seller (“4PM Seller” or “4PM”):  Gold, Silver, Platinum and Palladium.
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Highlights of 4PM Seller
 

• 4PM Seller has been the reference point for our clients in the precious metals chain for over 60 years.

 

• Every day, 4PM Seller not only works to ensure that quality, reliability, and responsibility, but 4PM is also the defining elements of the products and services that we offer to our clients.

 

• 4PM Seller has an international presence, and is close (even physically) to our business partners thanks to our Swiss parent company and to our affiliates in Germany, Italy and Latin America. 

 

• Precious metals: gold, silver, platinum and palladium, are a commodity traded 24 hours a day all over the world on markets subject to distinctive pricing dynamics. Our clients have access to international gold, silver, and platinum markets, and benefit from constantly updated information, competitive executions of trading orders, and a wide range of financial services.

 

• In addition, 4PM Seller offers a complete range of physical business services: transportation, insurance, location swaps, quality swaps, as well as conversion of all forms of metal (including scraps) into internationally accepted Good Delivery material or into semi-finished products for industry.

IMPORTANT NOTE

• Buyer MUST meet face-to-face with 4PM Seller at their Europe facility for initial acquisition.  Subsequent acquisitions can be arranged via secured private network if needed.

Referral Fee

​Please note your referral fee will be credited to you at closing; however, you must register your client with us.  One-time 0.5% of initial acquisition amount is our referral fee.  For example, if the initial acquisition amount is USD 1 million, your referral fee is USD 5,000 (Five Thousand USD).

Additional information

​​For additional information, please contact us.  We will email you additional information within 24 hours.
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