Bullion Coin Pricing

Have you ever noticed that two bullion coins which contain the exact same amount of the same precious metal, can sometimes sell for a different price?

For example, at the time of this writing, the spot price of gold is $787.50 per ounce. Yet, numerous dealers quote a selling price of $830.80 for the one-ounce American Gold Eagle, $826.90 for the one-ounce Canadian Gold Maple Leaf, and $819.00 for the one-ounce South African Gold Krugerrand.

Why might this be? After all, each contains exactly one ounce of gold. Should not an ounce of the same precious metal, like shares of the same company stock, always have one price at any given time?

Certainly, it seems like it should be that simple, but with precious metal bullion coins, it is not. The fact is that an ounce of a given precious metal -- be it gold, silver, or platinum - can, for a variety of reasons, cost either more or less than another ounce of the same metal in the same market.

How can this happen? Where does the additional cost for these gold coins come from in the first place, and why do the amounts paid for the Gold Eagle, Maple Leaf and Krugerrand all differ, even though each contains the same amount of gold?

Well, it's all about a pricing thing called "coin premiums."

A premium is the additional cost of a bullion coin above and beyond the market value of the precious metal commodity it contains. For example, with gold at a spot price of $787.50 as mentioned above, an investor can expect to pay a premium of $43.30 over the gold price to buy the one-ounce American Gold Eagle. On the other hand, at the same spot price, an investor will pay only a $39.40 premium (approximately ½% less than the Eagle) for a one-ounce Gold Maple Leaf, and only a $31.50 premium (or 1.42% less) for the one-ounce Gold Krugerrand.

In general, this additional cost over the spot price for any bullion coin stems from a number of factors, including the manufacturing, distribution, and administration costs incurred by the mint or refiner in making the coin, plus a "mark-up" representing the cost of sale and the profit for the wholesaler selling the coin to a retail dealer. The retail dealer, in turn, will also "mark-up" its wholesale price of the coin to cover its own sales costs and realize a small profit when selling the coin into the investor market.

This series of incremental price increases applied to the coin as it passes through the distribution chain is a typical market mechanism present in virtually every other industry in existence, from food to auto parts, and houseplants to sporting goods.

And, just as market forces of "supply and demand" largely determine the value at which all goods and services can be sold in their respective markets, the level of a given coin's availability (supply) versus its popularity (demand) also directly influences the prices at which different coins will sell for in the market place, even though they may contain the same amount of the same metal!

In fact, in some unusual market conditions, the available supply of a given coin, when balanced against its market demand at any given time, can have a pronounced impact on the coin's premium. Unusual demand for a specific coin type can drive its premium level significantly higher than that of very similar coins in certain circumstances.

Such a disparity occurred between the American Eagle and the Canadian Maple Leaf bullion coins at the end of 1999, when concerns over potential Y2K-related computer debacles created widespread fear about the stability of the US banking system and world economy as the new millennium approached. This fear, in turn, led to an unprecedented demand for U.S. American Eagle Silver coins, in the belief that their owners could spend these U.S. government-guaranteed bullion coins in the surviving economy for the food and other necessities they would require to live should the banking system fail. At the same time, the Silver Maple Leaf legal tender bullion coins, which not only contain the same amount of gold and silver, but were minted in higher purities, were left sitting in dealers' vaults.

Specifically, in late 1999, the premiums for the 99.9% pure (i.e., "3 nines fine"), one-ounce Silver Eagle coins were at one point 300-400% higher than were the premiums on the 99.99% pure (i.e., "4 nines fine") one-ounce silver Canadian Maple Leaf coins, even though the price of the one-ounce of silver they contained changed very little during the period. While the prevailing spot price of silver averaged about $6.50 per ounce during this time and the price of the silver Maple Leaf remained in the $7.50 vicinity, inordinate demand drove the price of the Eagle to more than $12.50 per coin at one point. Astonishingly, many investors were willing to pay up to four times more in premium costs than they had to for a silver bullion coin in the belief the American Eagle would be readily negotiable in whatever economy might be functioning in post January 1, 2000 period.

[Note: these inflated premiums collapsed to their more rational market levels immediately after January 1, 2000, when it was clear that an economic and banking Armageddon was not going to occur.]

On the other hand, a lack of market demand, or the outright dumping of a particular coin by market participants, can create a negative premium, causing the coin to sell at a price that is actually less than the current "spot price" of its metal content. This is what happened to the gold Krugerrand when its importation into the United States and numerous other countries was banned by many national governments in 1985 to demonstrate their countries' displeasure with the former apartheid policies of South Africa, the home of the Krugerrand. Few investors wanted to buy the Krugerrands that continued to trade in local markets, and dealers would only buy them at prices discounted below the prevailing "spot" price of gold. It was truly one of the few times that gold - in the form of Krugerrands -- has traded in the market below the spot price.

In fact, as noted at the outset of this article, though its premium has long since been positive, the Krugerrand continues selling at a lower premium than do the Eagles and Maple Leafs, reflecting its diminished popularly among investors and dealers still today.

Because coin premiums can vary significantly among coins and in different market conditions, they are an important aspect for buyers of bullion coins to understand today. Investors are well advised to inquire about and compare coin premiums before making their purchase of bullion coins. And as always, it is best to seek the advice of a reputable and trusted bullion dealer concerning any aspect of precious metals investing about which one may be unsure.

Copyright © 2005-2007 Mike Clarke and Gold and Silver Investments Limited. All rights reserved.

Michael B. Clark is a consultant to Gold and Silver Investments Limited ([email protected]), Ireland's Asset Diversification and Wealth Preservation Specialist. He is the President of Solidus Associates, LLC of Wilmington, Delaware, and has served in the precious metals industry for 25 years. He oversaw Deak-Perera's Precious Metals Certificate Program, America's largest precious metals investment program, in the early 1980s. Later he became Vice President of Precious Metals at Wilmington Trust Company, and President of both Delaware Depository Service Company and First State Depository Company. He obtained licenses for Wilmington Trust and DDSC to operate as Nymex and Comex depositories.