The spot price of silver has been very volatile recently and the retail physical market has been overwhelmed, with most dealers running out of silver coins and small bars. This isn’t the first time this has happened and it is unlikely to be the last time. These events highlight how, when it comes to buying physical precious metals, the spot price is not the whole story. Indeed, there are times when cheap silver or gold can be expensive.

The spot price of silver and gold

When discussing the price of precious metals, the most commonly quoted price is the spot price. The spot price is the price of gold or silver for immediate delivery on the global commodity markets. Counterintuitively, the spot price does not reflect the supply and demand of the physical metal. This is because the spot price is derived from the paper market which exerts a very strong influence.

The price of physical silver and gold

The physical price is the price paid to purchase physical precious metals and consists of the spot price plus a premium. Why does such a premium exist? The premium over spot covers additional costs such as melting the gold, producing blank rounds, designing the coins, and striking the coins. There are costs associated with transport, administration, and insurance. Additionally, there is a markup to allow profits for both the wholesale and retail dealer.

Factors affecting silver and gold premiums

A common misunderstanding among those that are new to the precious metals sector is the assumption that precious metals premiums are fixed. The premium over spot for silver and gold do vary, sometimes significantly. What are the factors that cause such variation?

  • Dealer
  • Country
  • Demand
  • Type of product
  • Volume purchased

Premiums differ between dealers so it is worth shopping around a bit, but having said that the variations are not large and selecting a trustworthy and reputable dealer is the most important factor, even if it means paying a slightly premium. Premiums even vary depending on which country and mint you are buying from. Unsurprisingly, physical demand for silver and gold is a significant factor. A sudden surge in demand for precious metals can send premiums soaring. At the retail level, the premium you pay will depend on what type of product you purchase. For example silver coins will carry a higher premium than silver bars, and the premium will be higher for minted bars versus cast bars. You will pay a slightly lower premium if you buy in bulk.

Silver and gold premiums in 2020-2021

Physical silver premium over spot (Source: didthesystemcollapse)

The above chart shows the premium for physical silver from April 2020 to February 2021. The volatility of the premium is quite evident. In early 2020 the premiums were high at around 60%, subsequently stabilizing mid year at approximately 20%. February 2021 saw a sudden and rapid rise in silver premiums to over 60%.

Physical gold premium over spot (Source: didthesystemcollapse)

The premium over spot for gold tends to be lower than that for silver. In early 2020, the gold premium was approximately 14%, stabilizing mid year at approximately 7%. Interestingly, the gold premium has been steadily increasing since November 2020 despite the spot price of gold dropping. Currently the premium for gold is 12%.

A brief history of gold and silver premiums

Some assume that premiums are correlated with the spot price and rise as the spot gold or silver price rises. In fact that is not necessarily the case.

Physical silver premium chart 2008 to 2015 (Source goldchartsrus)

The chart above shows the price history for spot silver at the top and the silver premium below it. Note the large spike in the silver premium to over 75% in 2008. This coincided with the 2008 crash in spot silver price. At the 2008 low, the spot price of silver was $8.50 per ounce but those that tried to buy the physical metal were paying around $15 per ounce. Paradoxically, when the spot price of silver was higher, the physical price of silver may have been lower.

Physical gold premium chart 2008 to 2017 (Source goldchartsrus)

Something similar also happened with physical gold prices in 2008, although it wasn’t nearly as pronounced as with silver. The gold premium surged to 8% in 2008. At the lows, the spot price of gold was $681 per ounce and the physical price of gold was $732 per ounce.

Conclusion

When it comes to precious metals, the physical price and the spot price are not the same thing. These two prices are governed by quite different factors.

The premiums for gold and silver do vary. The premium for silver varies a lot more than gold premiums. In fact silver premiums can surge to such levels that when the spot price of silver is cheap, the premium can make it much more expensive than you might expect.

Even more of a concern is that when the silver or gold spot price is cheap, the availability of physical gold and silver becomes an issue. Shortages of physical gold and silver bullion is likely to be an increasing problem for retail investors going forwards.