What Does The Premium Actually Mean?

In simple terms, a premium refers to the additional amount a buyer pays beyond the spot price of gold or silver, representing the cost above the raw material.

Every investment incurs costs beyond the asset's intrinsic value. For example, when purchasing stocks, one may encounter brokerage or transaction fees. Including premiums and fees in general discussions about an asset's price proves challenging due to their dynamic nature, changing over time and varying among sellers. This underscores the importance of exploring different options to find the premiums.

While many mistake premiums for commissions, it's essential to recognize that companies like True Gold Republic also incur premiums when acquiring gold and silver products. Similar to any other product, retailers factor in their expenses, resulting in retail prices being different from wholesale prices.

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Why are premiums at elevated levels?

Considerable attention has been directed towards the relatively high premiums on gold and silver over the past year. This phenomenon is primarily attributed to the dynamic interplay of supply and demand. When there is heightened demand for gold and silver, premiums invariably surge.

The past year has witnessed a significant uptick in the demand for physical gold and silver, reaching an 11-year high for gold in 2022, while silver demand achieved record-breaking figures in various categories. This robust demand has been a driving force behind the escalation of premiums.

Compounding the situation are supply challenges, particularly within government-run mints. These entities often struggle to scale up production efficiently to meet rising demand. A notable instance is the US Mint, which faced a considerable supply bottleneck, notably in the production of American Silver Eagles. In late 2022, a shortage of silver discs used to strike coins led to a significant Silver Eagle supply squeeze. The US Mint, reliant on external sources for disks, experienced a production shortfall, with only 12.8 million Silver Eagles struck through September 2022, compared to double that amount in the previous year. This scarcity has driven premiums to perhaps unprecedented levels over spot prices.

While the perception may be that all premiums are soaring, in reality, premiums have been lower for many gold and silver products, such as nationally or government-minted coins from other countries and privately minted bars. True Gold Republic can guide buyers towards products with considerably lower premiums and enhanced value, especially for those open to flexibility in their choice of gold or silver.

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Premiums: Not Necessarily Irrecoverable Expenses

Commonly, people perceive premiums as sunk costs, assuming that the additional amount paid for gold or silver won't be retrievable upon selling. However, this is not an absolute truth.

Contrary to the belief that premiums are irrecoverable, dealers also compensate investors with premiums when repurchasing gold or silver, especially during periods of heightened demand. For instance, True Gold Republic consistently offers a substantial premium above the spot price when buying back American Silver Eagle coins, and this premium tends to increase during high-demand phases with limited inventory.

Consider a scenario where silver reaches $100 amid supply shortages – True Gold Republic might potentially pay clients $150 or more per coin.

Ultimately, market dynamics will determine the value of these coins. Generally, as demand surges, buy-back premiums are likely to rise. If the demand trend persists, the premiums paid initially may not be truly sunk costs, and there's a possibility of recovering some or all of these premiums when selling your gold or silver in the future.

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Understanding The Difference Between Spot Price and Premiums:

The spot price represents the real-time market value of a precious metal, fluctuating continuously like any commodity traded on the market.

In contrast, the premium is the extra cost associated with a Precious Metal, accounting for factors such as fabrication, distribution, and potential additional collectible or numismatic expenses for rare items. Precious metals, traded in U.S. dollars, have specific weight units for pricing – silver and gold per troy ounce. For instance, the current spot price of Silver is approximately $23 per ounce, with a premium of around $6 per ounce for popular Silver Eagles, making their market price about $29.

Premiums can vary significantly, especially for rare Silver coins like Silver dollars, or collectible Silver bars that may be more challenging to produce. Gold's spot price is approximately $2000 per troy ounce, with various Gold coins having different premiums over the spot price. Staying informed about live prices is crucial for investors to make well-timed decisions when buying or selling Precious Metals, considering factors like production costs, rarity, and collectible value that drive premiums.

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Avoid These Common Coin Premium Scams

Numerous unsuspecting investors have fallen victim to dishonest coin dealers. Utilizing aggressive sales tactics, such as the classic bait-and-switch, these dealers promote products that turn out to be subpar investments. Unjustifiable commissions, substantial markups, and limited liquidity further compound the harm experienced by investors. These are the common things to look out for:

• Expensive Proof Sets - Proof sets that have 'great collectible value' because they are signed by someone. You're likely paying too much.
• Numismatic Hype - This coin has 'tremendous numismatic potential'. Only a few coins are good for numismatic growth. If you're not educated on numismatic coins then you should probably steer clear. Generally speaking, the best coins for numismatic growth are all 100+ years old e.g. Saint Gaudens Double Eagles (1907–1933) and Type 3 Liberty Head (1849 to 1866).
• Limited Edition Coins - These maybe "1 of 1000 produced". Just because it is Limited Edition does not mean it is valuable.
• Exclusive Coins - These are normally coins that are manufactured for one company. This means they make the market on these coins and will likely charge you a much higher premium. Will this premium be recovered when you go to sell? Probably not.

Our advice is to stick to Government backed mints that have a universal market value for these products.

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Several factors can influence the premiums on gold and silver:

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1. Product Type:

Coins: Coins often have higher premiums compared to bars or rounds due to additional design elements and potential numismatic value. Collectors may pay a premium for coins with historical significance or limited minting.

Bars and Rounds: Generally, bars and rounds have lower premiums as they are simpler to produce. Larger bars typically have lower premiums per ounce due to economies of scale.

2. Weight:

Larger Denominations: Larger bars or coins often have lower premiums per ounce because the production costs are distributed over a larger quantity of metal.

Smaller Denominations: Smaller coins or bars might have higher premiums as the production costs are proportionally higher.

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3. Purity:

Higher Purity: Bullion with higher purity levels may have slightly higher premiums because of the additional refining processes required to achieve that level of purity.

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4. Brand and Mint:

Reputable Mints: Products from well-known and reputable mints or brands may command higher premiums due to the perceived quality and authenticity. Popular mints include the United States Mint, the Royal Canadian Mint, and the British Royal Mint.

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5. Availability and Demand:

High Demand or Low Supply: During periods of increased demand or limited supply, premiums may rise as dealers adjust prices to balance supply and demand. Economic uncertainties or geopolitical events can also drive demand.

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6. Dealer Markup:

Operating Costs: Dealers charge a markup over the spot price to cover their operating costs, including storage, insurance, and transaction fees. The dealer's profit margin is embedded in the premium. Not all dealers carry the same markup on coins and bars, so make sure you understand what their markup is before buying anything.

7. Packaging and Certifications:

Special Features: Specially packaged or certified products may have higher premiums due to additional features such as unique packaging, certificates of authenticity, or special edition releases. More commonly you will see PCGS or NGC products carrying a higher premium.

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It's important for buyers to consider these factors collectively when making a purchase decision. Additionally, buyers should be aware of transaction costs, shipping fees, and potential taxes associated with acquiring physical precious metals. Staying informed about market conditions and being cautious during times of high market volatility can also help buyers make more informed decisions.