Monday, September 25, 2017

What is Spot Price?

This is a simple and brief explanation about precious metal spot price. Many first time buyers of Gold or Silver are not familiar with the term "Spot Price". There are also some misconception regarding "spot price" and the "retail price" of Gold or Silver. I have heard many times of people wanting to buy physical gold or silver at spot price. Quite impossible. For example, distributors are paying a premium above spot for the American Silver Eagles when they purchase directly from the US Mint.

Firstly, "spot price" usually refers to the price of "futures" contracts traded on "futures exchanges" operating in a number of countries such as New York, Chicago, London, Zurich, Hong Kong and Sydney. In the US, COMEX (Commodity Exchange) is the leading commodity exchange for precious metals and is a division of the NYMEX (New York Mercantile Exchange). The London market has a longer history that goes all the way back to the 17th century, and provides a platform for trading in silver and has remained the true center of the  silver trade globally.

On the right, you can see a chart of the spot price of gold and silver from kitco.com This is in real time

The spot price reflects market expectations of future price movements. It refers to quotes for large bars of precious metal which supposedly believed are stored in certified warehouse e.g. LBMA. Gold contracts on COMEX are 100 troy ounce bars per contract and silver is 5,000 troy ounces per contract. "Spot Price" refers to the current delivery price on futures contracts for precious metals.

Let's take silver as a reference.

Contracts or "paper silver", a promissory to deliver the specified amount of silver at a specified date in the future. But often than not, these contracts are usually bought back and there is no delivery of physical silver. However, there have been occasions where buyers want to take physical delivery. When the happens, the receipt of ownership changes hands. Take note then that the spot price does not include broker commissions, shipping/handling charges, insurance etc. Your physical silver now has incurred a premium.

There are many factors that affect the premium

The smaller the size, 1 ounce and lighter, the premium is higher. This is mainly due to production cost.

Then there is the supply and demand. Take for example, how many people can afford to buy a 1000oz Silver bar compare to a 1 oz silver bullion.

Other factors such as labour cost, production cost, (marketing), shipping/handling charges, insurance, geographical location etc

Kookaburra 1oz Silver CoinThe premium over spot also varies whether the bullion is a Private Mint and Government Mint coin. For low quantity, premium for 1 oz silver can start from a dollar plus to to a few dollars or more. Depending on supply/demand, desirability, mintage etc

Then you have the "collector's bullion" e.g. China Panda, Britannia or Perth Mint coins. Perth Mint 1 oz Silver Kookaburra has a limited mintage of 300,000 annually worldwide. These types of bullion coins usually commands a higher premium, even up to 45% or more above spot for a 1oz Silver. The past Kookaburra series are commanding a higher premium.

If you are keen to start buying silver, do your research first and keep a variety. From private mint to government mint and even those premium coins. The reason is quite simple because when you choose to sell them, you can also sell them at a higher premium because of the demand. But before you start investing in them, do your research first and ask around for the best price.  Make sure that the silver has a 999 fineness.