When buying gold, there is much more to consider than the mere spot price or market price. The value of gold in its raw form is different than the value of processed gold, which is why gold bullion coins are varied in price. Two coins might have the same weight and purity rating, but they could cost different amounts due to the differences in how they were processed and distributed.
To give an example, say the spot price of gold was $1,000 per ounce. The value of an American Gold Eagle 1 oz coin might be $1,071, a Canadian Gold Maple Leaf 1 oz coin might be worth $1,049, and a South African Gold Krugerrand might cost $1,048.
Why is this the case? Why aren’t the coins a flat $1,000?
Each coin has the same amount of gold, but the company that handles and distributes the gold charges a premium in order to make money. This is true for any given precious metal, as well as precious metal dealers.
There are a number of reasons why the value of these coins might differ, but the additional cost is always referred to as the “coin premium.”
What is a Coin Premium?
Simply put, coin premiums are the sum of the additional cost of moving raw gold from the source to the market in the form of a specifically shaped coin.
In the example given above, the coin premium for the American Gold Eagle would be $71 since the spot price of gold was $1,000.
If you are paying attention, you will notice that means the coin premiums for the Canadian Gold Maple Leaf and the South African Gold Krugerrand are $49 and $48 respectively. So why is there a discrepancy in the gold premiums?
Whenever a product changes hands, a small increase in the price is included to compensate the mover for their function. This might include the cost of processing the raw gold into coins or distributing them to the market. It might also include any administration costs that the government incurs as a result of selling the coins.
These costs include the salaries of those who process the sale and purchase the coins, as well as any teams that work to prevent counterfeiters. These costs are typically called “mark-ups,” and they can slowly increase the cost of one piece of gold from its starting value at the spot price.
By the time the coin reaches the final wholesale level, the value of the gold itself has already been increased several times to make up for the journey it takes. The wholesaler will also add a slim increase to the price to cover the costs of selling the coins, along with a small bit of profit.
Why Tolerate a Gold Premium?
Many investors ask why they can’t simply buy raw gold at the spot price and do with it what they will. To be fair, that is an option, but virtually no one invests in gold that hasn’t been processed to some degree.
If an investor were to suddenly start buying raw gold, he or she wouldn’t be able to make a profit from it unless the spot price goes up over time. Investors tend to prefer gold coins because they actually have the potential to fluctuate in price separately from the spot price of the substance itself.
For example, an investor might purchase an American Gold Eagle coin at a price of $1,075, and that specific coin variety could increase in value up to $1,100 simply due to supply and demand. Thus, the investor can make a profit off the gold coin without the spot price changing at all. This is why gold coins are priced differently even within their own system.
In the same way some coin collectors go for rare pennies, half-dollars, and quarters, other coin collectors are on the lookout for rare gold coins. Rare gold coins aren’t rare because they are made of gold, but rather because of the method and style used to develop that gold into a coin.
Tolerating a gold premium is really no different than tolerating the mark-up on any other products. All products have this sort of incremental price increase as they move through various distribution channels. A market driven by supply and demand will see prices of all goods varied by their popularity and availability.
To put this in perspective, simply take any modern household object and imagine where all the individual components came from and how much work went into them. All those background costs must be added to the cost of the raw material in order to make it worth the time of the producers to create the product in the first place.
What’s the Best Gold Premium Value?
When considering coins made from precious metals, it can be difficult to decide where your investment should go. There have been cases in which certain lucky investors hit the proverbial jackpot by purchasing coins with an unusually high demand, which in turn increased the coin premium to staggering levels. At the time, these investors might have had no idea the bump would happen, but they were able to profit from it nonetheless.
Can anyone expect the value of their gold coins to increase? Due to the simple fact that the spot price of gold continues to rise, one can expect a positive investment from any given gold coin, but there are certainly some that might produce better returns than others.
Unfortunately, as with almost any investment, there is no real way to know for sure what the future will bring.
Make the Gold Premium Work For You
By focusing on more than the mere substance of a precious metals coin, you can make the investment work for you in the strongest way possible. This is how the smartest investors make the greatest profits.
Savvy investors will also pay close attention to the spot price of gold as well as the current premium values on the most common coins. The better you can equip yourself to handle the stresses and opportunities of the market, the more likely you are to become a successful investor in gold, silver, or other precious metal coins. Don’t ignore resources that could help you reach that goal.
That said, if you are interested in beginning your investment in precious metals, check out our Gold and Silver Bullion Investors Knowledge Center for all the information you need to get started or grow your portfolio.