Precious Metals Investing 101: Understanding the Premium on Coins and Bars
Investing in precious metals is an excellent way to diversify your portfolio. Precious metals, such as gold, silver, platinum, and palladium coins and bars, provide a tangible asset that can help protect against inflation.
While the idea of investing in precious metal coins and bars can be intimidating, understanding why they have a premium over their raw metal value can give you a better appreciation of why they are an attractive investment option.
Knowing the different types of coins and bars available, as well as their premiums, is essential to making an informed decision when investing in these products.
Let’s dive into the world of precious metals and explore why these items are more valuable than their face value.
Table of Contents
What is a Premium ?
A “premium” is an additional fee charged above and beyond the spot price of gold, silver, platinum, and palladium coins and bars.
The premium helps cover costs associated with production, distribution, transportation, storage, marketing, sales tax (if applicable), dealer commissions, and other expenses associated with bringing the coin or bar from its source to your front door.
This means that the actual price you pay for any given coin or bar will be higher than its spot price.
The Premium On Precious Metals
Why Does the Premium Exist ?
The most common question that any new investor has is “Why does the premium exist?” After all, if you want to buy an ounce of gold today, shouldn’t you just pay the spot price?
The answer has everything to do with supply and demand. Let’s say there are only 100 ounces of gold available for sale at the spot price of $1,200 per ounce.
But there are 1,000 people who want to buy gold at that price. In order for everyone to get their hands on gold, they will have to pay a higher price – hence, the premium.
As more gold becomes available for sale, or as fewer people want to buy gold, then the premium will go down. It really is that simple!
The premium on precious metals is the difference between the actual spot price of gold or silver (known as its intrinsic value) and what you pay when you purchase a physical coin or bar (known as its market value).
Why Premium is Necessary
This premium varies depending on the type and quality of the coin/bar being purchased, but generally speaking, it will range anywhere from 5-20%.
This premium is necessary because it covers all production costs associated with creating physical products out of gold or silver such as manufacturing fees, transportation costs, storage costs, etc.
If there was no premium attached to these products then it would be difficult for dealers and refiners to stay in business since most people would simply buy gold/silver at spot prices instead of paying extra for physical products with added premiums attached!
Factors that Determine Premiums
There are several factors that go into determining how much premium you will pay for a particular coin or bar including:
Supply & Demand
Supply and demand play a big role in how much precious metals are worth. When the supply is low, prices are higher due to increased competition from buyers; when there is an abundance of coins or bars, prices tend to be lower.
The same applies to the demand side—if there is an increase in demand for these items, prices will go up.
The cost of producing a coin or bar is also taken into consideration when determining its value. This includes production costs such as labor, materials, manufacturing, shipping, etc.
As with any product, the more expensive it is to make something, the higher the price tag generally is on the final product.
Precious metals come in different forms such as Gold, Silver, Platinum, and Palladium. As you may expect their values are not all equal; depending on which one you choose you can get more or less bang for your buck!
Generally speaking, gold has historically been seen as a safer bet due to its relative stability in times of uncertainty but other metals should not be discounted either since they each have their own unique properties which can make them attractive investments too!
Weight & Purity
The weight of a coin or bar can affect its value; heavier pieces will typically be worth more than lighter ones (all else being equal).
Additionally, purity can also play a role in how much something costs – purer pieces will often cost more than those with impurities present.
This is because purer pieces are considered to be “better quality” and thus command higher premiums from buyers who want the best possible investment option available!
Authenticity & Rarity
It goes without saying that authenticity and rarity also help determine how much something costs; if it is authentic and rare then it will likely fetch a higher price than if it were not either one of these things (or both).
Additionally, this applies even more so if there are only certain examples known to exist – this makes them substantially more valuable due to their scarcity!
Storage Costs & Security Measures
Lastly, we must consider storage costs associated with storing large amounts of precious metals safely – both at home or elsewhere – as well as security measures necessary for protecting them from theft/damage, etc.
All these things must be factored into pricing decisions so that buyers know exactly what they’re getting themselves into before making any commitment.
Another factor that helps determine value is design; if something has an attractive design then it may be worth more than something with an unattractive one (all else being equal).
Similarly, condition of course plays a role too – coins and bars which have been well preserved over time tend to hold their value better than those which have been damaged or otherwise worn down significantly over time.
Finally, history can also come into play here; if something has significant historical relevance such as being part of an ancient collection then its value could potentially skyrocket due to interest from collectors looking for unique pieces like this one!
Geopolitical factors such as international conflict or economic instability can also cause prices of precious metals to fluctuate dramatically.
when people feel uncertain about their financial situation they often turn towards commodities like gold and silver as safe havens in order to protect themselves against potential losses incurred by other investments during turbulent times.
Similarly, governments around the world may intervene directly by creating policies that favor certain commodities over others – all of these things must be taken into account when considering investing in precious metals!
Collectible Vs. Bullion Grade Precious Metals
When discussing precious metals, it is important to first differentiate between collectible coins and bullion-grade coins.
Collectible coins are usually ones that were minted prior to 1965 or have some sort of special feature or design that makes them appealing to collectors.
The value of these coins is based on their rarity, not their metal content. Bullion-grade coins are newer coins that are still actively minted, with values that depend on the current market price of gold or silver.
Bullion Coins vs. Bars
Bullion-grade coins come in two forms – coins and bars. Coins are often seen as having more potential for growth since they can be both collected as well as traded for their metal content, whereas bars tend to mainly be used for trading purposes due to their lack of aesthetic appeal.
Many investors prefer bullion coins because if held for long enough, they could gain significant premiums over time due to scarcity or special features such as a limited mintage or unique design elements that make them desirable among collectors.
For example, a set of American Eagle Gold Proof Coins issued in 2018 may be worth significantly more today than when they were originally purchased due to the limited mintage and its current desirability among collectors.
Gold Coins vs Gold Bars
Gold coins typically carry higher premiums compared to gold bars due to their collectible appeal and smaller sizes – making them easier to store and transport.
Gold bars tend to offer lower premiums due to their larger sizes which require less labor and resources during production as well as fewer costs associated with transporting them from the refiners over long distances.
As such, they tend to offer more “bang for your buck” in terms of pure gold content per dollar spent on them compared to coins of similar size and fineness/purity rating.
However, if your primary goal is liquidity then coins may be better suited since they generally receive more attention from potential buyers during times when markets are volatile or uncertain such as now during these pandemic-induced times when investors seek safe haven investments such as physical gold and silver bullion products like coins and bars.
Identifying Quality Coins and Bars
When investing in precious metal coins or bars, it is important to know what makes them valuable and how to identify quality coins or bars.
Coins and bars should be composed of high-grade metals and be free from blemishes or defects.
Each product should also have certifications that guarantee the authenticity, weight, and purity of the metal.
Let’s take a closer look at how to determine which ones are worth your investment.
Purity & Weight
When it comes to investing in gold or silver coins or bars, purity is key. You want to make sure that the items you purchase have been certified by an independent third party as being made from genuine precious metals.
The weight of the item also matters. For example, if you buy a 1-ounce gold coin, it should weigh exactly one ounce when weighed on a scale. This ensures that you are getting what you pay for.
Precious metals like gold, platinum, and palladium must have a purity of 99.5% minimum, whereas silver must have a minimum of 99.9% purity level.
When buying coins or bars made from precious metals, always look for certification marks on the item itself. These marks indicate that the product has been inspected by an independent third party and verified as genuine.
This is especially important if you plan on reselling the item later; without certification marks, it could be difficult to prove that your coin or bar is genuine.
Additionally, some governments require certain authentication marks before they will recognize an item as legal tender.
Design & Quality
The design of coins or bars can also be indicative of their quality. For example, if a coin has intricate designs and patterns carved into it or if its surface is reflective rather than matte then it is likely made from higher quality materials than those with simpler designs or dull finishes.
Of course, this isn’t always true – some lower quality coins may have fancy designs – but generally speaking, higher quality materials tend to have more intricate designs than lower quality materials do.
Matching Your Investment Objectives with the Right Metal Type
Different investment objectives require different types of metal. Gold and silver are the two most popular precious metals for investors, but platinum and palladium also offer attractive opportunities.
Investing in gold offers potential for long-term capital appreciation, while silver is more volatile but often experiences larger price gains when prices increase.
Platinum and palladium provide a hedge against inflation and can be used to diversify an investment portfolio.
Buying From a Reputable Vendor
When investing in precious metals, it is important to buy from a reputable vendor. Buyers should look for vendors that have experience in the industry and are knowledgeable about coins or bars.
Additionally, buyers should make sure the vendor offers competitive prices and is willing to answer any questions or concerns.
Our Top Recommendations
- Augusta Precious Metals
- American Hartford Gold
- Birch Gold Group
- Noble Gold Investments
Tax Implications of Investing in Precious Metals
Before investing in precious metals, it is important to understand the tax implications associated with these investments.
Depending on the country or jurisdiction, there may be taxes that need to be paid when selling coins and bars.
Additionally, certain tax benefits may apply to investments in precious metals, such as exemptions from capital gains taxes or other deductions.
Tax Treatment for Capital Gains
First, let’s start with capital gains taxes. Any time you sell a precious metal for more than what you paid for it, the difference between your purchase price and sale price is considered a capital gain.
The number of capital gains that you owe depends on your individual income level and filing status; if your income is below a certain threshold, then you may not owe any taxes at all on your investments.
But if you do owe capital gains taxes, they are generally lower than regular income taxes.
Learn more by clicking the link below.
Tax Treatment for Losses
It’s not just profits that can have tax implications; losses can also affect how much money you pay in taxes.
When investing in precious metals, any money that you lose on a sale is considered a capital loss. You can use these losses to offset other capital gains, reducing the amount of taxes that you owe in a given year.
However, there are limits to how much of a loss can be used each year—check with your financial advisor or accountant for more details about these limits and how they apply to your particular situation.
Finally, it’s important to note that there are reporting requirements associated with owning certain types of assets like gold and silver bullion coins or bars (as opposed to ETFs or stocks).
Depending on the type of asset and its value, investors may need to fill out additional forms when filing their taxes each year—again consulting with a financial advisor or accountant is recommended when determining whether these requirements apply to your investments.
Investing in precious metals is an excellent way to diversify your portfolio and protect against inflation and market volatility.
Knowing the different types of coins and bars available, as well as their premiums and tax implications, will help ensure that you make the right investments for your financial goals.
You now know what drives premiums up or down! Keep these factors in mind next time you’re looking to buy precious metals; they’ll help you understand why some products cost more than others.
Buying from a reputable vendor and storing your product safely and securely are also important considerations to keep in mind.
By understanding these factors new investors can make sound decisions when investing in precious metal products regardless if they choose coins or bars.
Check out our Top 5 Precious Metals Investment Companies here.