Some mints such as Australia’s Perth Mint allow individual buyers to purchase bullion coins directly. The US Mint’s bullion program, including the popular Gold and Silver Eagle coins and Gold Buffalo, instead requires that bullion coins are first sold through a network of “Authorized Dealers.” This practice is meant to maximize the availability and efficient distribution of these coins to the market. While I focus here on the US Mint, note that other national mints such as the Royal Canadian Mint employ similar practices for their bullion coins while the China Banknote Printing and Minting Corporation sells directly only domestically.
How the U.S. Mint Prices and Distributes Bullion
The laws that detail US Mint bullion programs (The Gold Bullion Coin Act of 1985, The Liberty Coin Act of 1985, 31 U.S.C. § 5112(ii)(51)(iv)) demand that Mint bullion coins be sold to authorized dealers at a static or relative markup ($2 for Silver Eagles, 3-9% depending on denomination for Gold Eagles, and 4% for Platinum Eagles) based on the spot price for the bullion at the time of sale as well as the cost of minting and distribution to dealers. Selling in bulk to authorized dealers for dissemination to the public may seem like a needless middle-man ploy, but competition between secondary sellers and the low base premiums charged by the US Mint ensure that end-prices for consumers remain relatively close to the spot-price and in line with other bullion programs. Bullion buyers are interested in buying precious metals for a cost as close as possible to the spot price, meaning that authorized dealers must endure a low profit margin on bullion coins that are already being sold to them at a premium.
In addition to the relatively low profit per ounce that bullion sales bring, firms that seek to become authorized dealers for US Mint bullion coins must subject themselves to substantial scrutiny in the form of independent financial audits; they must demonstrate that they have sufficient capital (a minimum of $10 million in net worth) and market presence before they can be approved. Additionally, approved firms must obey minimum purchasing rules; orders of Silver Eagles must be of at least 25,000 ounces, for instance. To put that in perspective, let us assume that silver has a spot price of $20/oz, which becomes $22/oz after the inclusion of the $2/oz markup from the US Mint. A minimum purchase of 25,000 ounces will cost an authorized dealer $550,000. Selling that inventory at an additional premium low enough that secondary dealers will be able to turn a profit for themselves means that the authorized dealer is not likely to make more than a few percent and must rely on volume of sales.
Why the U.S. Mint Does Things The Way They Do
Unfortunately, laws such as those that outline the US Mint's bullion program infrequently mention the exact reasoning behind their contents, but there seems to be an additional, less altruistic motive behind selling through licensed distributors: cost to the Mint. If we think about minting and distribution in terms of dollars and cents, the decision to work through private firms who can divvy out bulk purchases from the Mint is much more economically sound than the Mint distributing smaller quantities per order directly to individual buyers. Put simply, if the Mint begins distributing the same quantity of bullion as smaller individual orders, this increases the distribution cost per ounce. This increase in cost would also inevitably be passed on to the consumer, thus marginalizing whatever benefit they might receive. Whether a direct purchasing option from the Mint would actually be advantageous for consumers is up for debate, but the current state of bullion buying clearly benefits the Mint itself.
For those interested in purchasing US Mint products as collectibles, many are offered in proof condition for direct sale to the public. These proof collectibles generally have the same amount and composition of precious metal as their uncirculated bullion counterparts, but often demand substantially higher premiums over the spot price. This increased premium can be due to a number of factors, including special or alternate designs, finer polish and greater luster, etc. Proof coins are also struck and sold in much lower numbers than uncirculated bullion coins, meaning that they are shipped in substantially smaller quantities, equating to a higher distribution cost per ounce. The higher mark-up and reduced impetus on shipping large numbers of coins cheaply means that the direct sale of proof coins is much more tenable for the Mint.
As frustrating as it may be for the individual investor to be forced to purchase bullion coins through a middle-man, the Mint's practice of selling through authorized dealers is not quite as unfavorable as it may initially seem. The distribution of bulk quantities of bullion coins to dealers allows the Mint to keep their initial markup relatively small while competition between dealers stabilizes final costs at a low premium above the spot price. Furthermore, alternatives exist for those precious metals buyers seeking to avoid dealing with products from national mints altogether. Silver Rounds and bars produced by private mints generally offer the same purity as bullion coins. If your objective is to buy as much precious metal as possible for the lowest price, it may prove fruitful to compare prices between mints and their products, though you might be surprised at how low bullion coin premiums can actually be.