One typical misconception among gold buyers is that gold dealers make more money when the gold’s price increases. Thus, they lose money when the price of gold decreases.
Well, nothing could be far from the truth when selling gold. Remember that gold dealers are highly risk-averse, considering the volatility of the precious metals market. And thus, they are unlikely to predict future spot gold prices.
How Do Gold Dealers Safeguard Themselves Against the Volatility of Price Fluctuations?
Gold dealers generally fall into two categories: those who maintain their inventory and handle in-house shipping and those who broker sales and rely on drop-shipping from larger wholesalers. Some operate a combination of both models, stocking certain products while drop-shipping others.
Many silver bullion dealers who hold inventory hedge strategies within the gold market. Suppose purchasing gold represents a “long” position, dealers “short” gold in the futures market (betting on a price decrease). This approach shields them regardless of whether the physical gold price rises or falls.
For instance, if the gold price goes up by $50, the gold dealer gains an extra $50 on the customer sale but loses $50 on the short position. Conversely, if the price drops by $50, the gold bars and gold bullion dealer incurs a loss on the sale but returns to the short position.
Gold brokers, on the other hand, remain unaffected by the spot price. The price they charge customers is nearly identical to what they buy from wholesalers. Essentially, they transfer hedging responsibility to wholesalers while earning a profit through premiums.
In both scenarios, the system isn’t foolproof. Many gold dealers lock in a price with the customer before payment. Dealers without hedging or brokers who’ve secured deals with wholesalers face price risks if the customer decides not to pay. While some investors equate buying bullion with purchasing items online, cancellation of orders poses substantial issues for dealers. A simple cancellation can translate to significant losses for a dealer.
So, How Do Gold Dealers Generate Profits?
They earn money through the “premium,” the amount charged above the spot price. For instance, a US Mint Gold Eagle might carry a $60 premium over the spot price. However, assuming a dealer makes $60 per coin isn’t accurate, as dealers don’t buy gold, coins, and other precious metals at the spot price either.
The process of melting, refining, and minting gold futures into bullion coins incurs costs. Entities like the US Mint charge authorized wholesalers a 3% premium for Gold Eagles. There are only around a dozen such wholesalers, and the 4,000+ dealers across the US must then acquire Gold Eagles from these distributors at a premium. As a result, the gold coin a customer purchases from a local dealer could cost the dealer around $40-$45 over the spot selling price.
Interestingly, in a transaction involving ten gold investment coins with a total value of $14,500, a gold dealer’s profit may amount to just $100-$150, approximately 1%.
Gold dealers, like all for-profit businesses out there, need to make money. Be extra careful when selecting your gold dealer. Ensure you read reviews, check for ratings, and shop around to guarantee you’re getting the best rates and experience for all your needs. Consider the information above if you want to sell gold in the precious metals industry.