Investing in Precious Metals: What is Premium Over Spot?
Newcomers to the precious metals industry are often confused by all of the terms that are thrown around like everyone is supposed to know exactly what they mean.
“Premium over spot” pricing is one of the terms that can cause the most confusion. To give an accurate explanation of what this means, you first need to understand what “spot” and “premium” mean.
What Does “Spot” Mean for Gold and Silver?
This is the price of the commodity, whether it is gold, silver or platinum. These prices are set by independent worldwide organizations and are based on the expected supply and demand of the precious metal.
Most exchange organizations that influence the price of precious metals are based in the U.S.A., and the UK but as the world continues to develop other countries are experiencing significant growth in their own exchanges, and are playing more of a role in determining the spot price.
The spot price also takes into account contracts for ‘Futures’, which producers and investors use to bet on the commodity’s price – if it will rise or fall. Exchanges offer these futures contracts to give investors more leverage and flexibility than trading in the physical market. There is higher risk here, but also higher potential for an ROI.
What Does “Premium” mean when buying gold and silver?
The word “premium” in gold and silver is often talked about, and means the amount needed for the business to manage its operations and make profit. In the precious metals industry, the premium is used to fulfill orders, buy supplies, manage advertising, pay for insurance, educate buyers and sellers, and manage other costs.
This is rarely a set amount of money. It can fluctuate depending on your country’s economy, where it originated, the number of coins/bars produced, the demand for the gold/silver, which mint produced it and the collectability of the bullion.
So, what does “premium over spot” really mean?
It is the “markup”. It’s the part of the price for gold and silver that the business uses to fund its operations, just like any other product you buy from any other store. Some investors seek to increase their investments by purchasing last quantities as close to the spot price as possible, while others may wish to buy also based on the collectibility of the bullion.