You may notice while browsing a precious metals dealer’s website that nearly all of the products cost more than the spot price of the metal contained in them. This premium is over spot price is simply a fact of life when buying bullion, but why are premiums sometimes seemingly inconsistent? Why is it that a 10 oz silver bar might have a premium of only $0.99/oz over spot while an American Silver Eagle can cost $2.99/oz over spot? It’s all bullion, right? Well, not always, and even when it is, not all bullion products are created equally.
Bigger Volume, Smaller Premium
Perhaps the most basic way in which premiums on precious metals products differ is related to quantity. Just like at Sam’s Club, buying in bulk, meaning in larger weights as well as in more units per order, generally decreases the premium over spot price you pay. Hypothetically, 1 oz silver bars may have a premium of $1.19/oz or more over spot while a larger bar like a 10 oz or 100 oz might have a premium of $0.99/oz or less. I only use bars here as an example; the same principle applies to rounds, coins, and any other form of bullion. Many precious metals dealers who sell bullion actually operate much like Sam’s Club in that they want to move as much volume of precious metal as possible, and so are willing to charge lower premiums for larger orders and products containing more metal in an attempt to do just that. Conversely, many fractional bullion coins, or those containing fractions of an ounce of precious metal (½ oz, ¼ oz, etc), actually carry progressively higher premiums the smaller the coin. Of course, the higher premiums for these fractional coins are actually charged by the mint.
Government Issues, Name Brands, and Generics
Yes, another source of difference in premiums comes from those imposed by the producer. You may notice that bullion coins often have a higher premium than rounds or bars of the same weight. That is because many national mints add a premium to their coins that is greater than what is normally placed on rounds or bars. This premium owes to a number of factors, one of which being the costs inherent in minting the coins. Engraving and maintaining dies, storage, and distribution all contribute to the premium found on bullion coins. Of course, production of bullion rounds and bars also incur most of these costs as well. The other major factor is demand. Bullion coins are immensely popular among precious metal buyers who are drawn to them because of their “brand” and because they have a legal tender status. Together, this generally means that bullion coins are more “liquid” than other forms of bullion; they can be more easily exchanged for currency. Just as bullion coins obtain a higher premium because of their association with a national government, privately minted bullion bars and rounds may have different premiums based on their brands as well.
The Murky Middle Between Bullion and Numismatics
Most bullion products are produced and sold solely for the value of their metal, meaning that their premiums must be kept relatively low in order to be worthwhile for buyers. With bullion coins, this means that a vast majority of those produced are in the “uncirculated” state, meaning that they are just regular, albeit freshly minted and relatively untouched, coins. For those that enjoy collecting bullion coins for their excellent designs rather than buying them as an investment, there exist proof versions of many nationally minted bullion coins. Proof coins are struck using special dies to be especially beautiful, and accordingly, they sell for much higher premiums than their uncirculated counterparts. Whereas an uncirculated silver bullion coin might go for a premium of perhaps around $3, a proof version of the same coin can demand a much higher premium, especially if highly graded by a reputable grading service. Yes, proof coins are technically still bullion coins, but are more appropriately called “semi-numismatic” because they are purchased more for their collectible value than for the value of their metal.
As you move away from bullion products into the realm of collectible coins or “numismatics,” you tend to see the majority of value swing from the intrinsic value of metals to the collectible or numismatic premium. Numismatic coins have the highest premiums because their intrinsic values are low relative to the amounts many collectors are willing to pay. Some numismatic coins can have face values as low as $0.05, metal values of $10, and still sell for hundreds and hundreds of dollars.
So, even seemingly similar precious metals products can include some very different premiums into their costs. Bullion products generally have lower premiums by necessity, numismatic coins can have almost absurdly high premiums, and semi-numismatic proof coins blur the line between bullion and collectible. Even within the category of bullion products, there is a certain degree of disparity between the premiums charged for coins and bars and rounds. What does this mean for the prospective precious metals buyer? Well, that depends on what your reasons for buying are. Collectors can buy whatever they enjoy while those that want to buy bullion as an investment will probably benefit from comparing the premiums for bars and rounds with bullion coins and then consulting with their favored dealer.