Spreads, Etc.

It's about time to go into a few ways that markets work, and why. As in the stock market, all items have a "spread." No, this isn't peanut butter or peach jam, but a common expression used by traders not only in metals, but in stocks as well. An expression indicating a 'spread' may be, "GM is 35 at 32." What does this mean? It means that if you want to buy a share of GM, it will cost you $35, and if you want to sell a share of GM, you can get $32. Why the difference? It is to protect the dealer, for all practical purposes. As an example, suppose your broker bought your GM at $32, and the market went south, with GM selling at $25? He is holding GM which he bought at $32, and hadn't a chance to sell it even at a break even price. He lost, in other words. Had the spread been wider, the broker might have suffered a lower loss or even none at all.

Stocks with a bigger risk, or stocks which are less known or are traded less, have a much larger spread. Joe Blow's Pizza stock might have a huge spread, because the broker doesn't want to get stuck with stocks he may not be able to sell for a long period of time. The cost of money also affects spreads. If a buyer or broker has to buy a stock and sit on it for months, or even weeks, the money he put out to buy that stock cost him a return on his money, and everyone needs a return on invested funds. If a broker bought Joe Blow's Pizza and it sat on his shelf for a couple of months, the cost of the money he bought it with, plus the difference between his purchase and sell price all figures in. No one operates a business without a profit motive.

Spreads then, to put it succinctly, are the differences between the "buy" (you buy) and "sell" (you sell) of stocks, coins, or many other things. As far as precious metals are concerned, spreads are NOT the price an item is over spot. No one buys anything at "spot," because the "spot" price is merely an indicator. Prices of things have manufacturing, and distribution costs over "spot." Let's then talk about the spreads on gold and silver. Canadian Maple Leafs have always seemed to me to be a terrible buy, and for two reasons. (1.) The spread is usually $20, and that's outrageous. As I write this, as an example, "Mapes" as we call them, are $643.10 at $623.10. That phrase means that the "bid" price, which is what you can sell them for, is $20 less than the "Ask" price, which is what you buy them for. The "spread" on Maple Leafs then, is $20. (2) The Maple Leaf is very soft, and has no alloy in it to make it hard and scratch and bend proof, as do Krugerrands and American Gold Eagles. If a Maple Leaf is scratched or bent, even slightly, it will get $10 less than if it were perfect. Add $10 to the huge spread, and it is a $30 discount from the "ask" price if you wish to sell. I do sell a lot of Maple Leafs because people want them, and I am here to service customers.

The American Gold Eagle is usually a couple of bucks higher than the Maple Leaf, but its spread is half, or usually $10. The Gold Eagle also has ,09 oz alloy in it, making it hard and virtually indestructible. It weighs in at 1.09 ounces, and has one full ounce of gold in it. The Gold Eagle is usually about $22-$24 over spot. They are made at West Point New York at the U.S. Mint, and are supposedly made with 100% U.S. Mined gold.

The South African Krugerrand is the most gold for the least dollars as far as a one ounce coin is concerned. Not as pretty as the Gold Eagle, but usually from $4 - $6 over spot with a spread of well under $7 usually. Forget dates as far as Krugerrands are concerned. I have never seen a new one. They, like the Gold Eagle, weight in at 1.09 ounces, because they have one ounce of pure gold and .09 oz of alloy to make them hard.

By far the cheapest over spot of gold coins are the Austrian 100 Corona, and the Mexican 50 Peso, which are also among the most beautiful and oldest. The "Mex 50" is dated in the 1920's and the "Austrian 100"" is dated 1915, and may be a re-strike, we don't know. They both have a low spread and are about a buck over spot. However they are not exactly one ounce. The Austrian 100 is .9802 of an ounce, and the Mex 50 is 1.2057 ounces. Absolutely the lowest price over spot and very low spreads, but not exactly one ounce, which most seem to want. I probably sell 20 Krugerrands for every one of other coins.

Silver, I believe will return to its normal 16 to 1 ratio eventually, which means that it will go up three times further than gold, since its current ratio is about 48 to 1. The ratio has been as high as 77 to 1, so it has already outpaced gold by a considerable degree, and I think will continue to do so. Of course silver has two disadvantages. (1) The spreads are higher than gold, usually about 50 cents an ounce, and (2) Silver requires a lot more storage space than gold. You can perhaps hold in both hands enough gold to buy your house, but that amount of silver might require a pickup load. Big stuff! The cheapest way to buy silver is my least favorite, and that is "bags" of U.S. pre-1965 coins. Many times one can buy silver at below spot in "bags," but they are so damned heavy and difficult to store, that I don't like them. I prefer 10 ounce bars, which are unbelievably beautiful, or 100 ounce bars, both of which are 50 cents over spot per ounce. Currently, I have Englehard 100 ounce bars at 22 cents over spot in lots of five. Why? Because they are not new, and any manufacturing cost has long ago worked its way into their price. Silver bars have no moving parts, and the Englehards are very nice and easily stored, so I recommend them. Silver rounds and Silver Eagles both are pretty and have one troy ounce of silver in them. The Silver Eagles are 95 cents per ounce more expensive than the rounds. Why? Because the Silver Eagles are made by the U.S. Government at West Point, and nothing the government does is economical. The rounds are made in Idaho by a private mint, which happens to be very efficient. The spread on all is 50 cents per ounce usually. Silver Eagles are dated, and can increase in value slightly as the years pass, due to their dates. Rounds are not dated.

The Mexican Libertad is a one ounce silver coin also, and I have the old style ones at 75 cents over spot. New ones don't seem to be available, and if they were, they would be at least far more expensive than even Silver Eagles. You maybe can go to Mexico and get the new ones. Take a chance!

One other thing you may not be familiar with, and that is the designation "MS 69" which I have on my web site for the new Buffalos. Buffalos are pure gold and easily scratched and dented, so the U.S. Mint ships them in sealed flat sheets of 20. My supplier (A-Mark) sends a few off to the professional graders, and they come back "MS 69." The term MS means Mint State, and a perfect coin is MS 70. The difference in price between an MS 69 and an MS 70, to me is not worth the price, so I don't list them. Buffalos are neat, and for myself I bought a sheet of 20 plus a dozen MS 69's, just to have them, but the Krugerrand, Mex 50, and Austrian 100 are my way to buy gold, because of their low price over spot and low spreads.

One other gold item that does pretty well is the Credit Suisse one ounce gold bar at $8 over spot, or the ten ounce ones at $6 over spot. They are wrapped in clear plastic and have serial numbers. Kilo bars of gold (32.15 ounces) are $3 over spot, but the Austrians and Mex 50's to me are better buys, but not always available Protect yourself with something, no matter where you get it. PLEASE!

November 16, 2006

Don Stott has been a precious metals dealer since 1977, has written five books, hundreds of columns, and his web site is www.coloradogold.com