Bullion price

Cutting through the bullion price confusion

We realize that bullion price issues can be a tad confusing. Premium? Spot price? The pricing index of gold? Bid? Ask? Spread? What’s it all about, Alfie?

In this article, we’ll gently ease you into the jungle of bullion pricing.

Right on the spot!

If you open the newspaper to the financial pages or navigate online to a precious metals website, you’ll probably find a neat little table telling you how much your gold bullion is worth at today’s market price.

In the paper, that’s something of a frozen picture, usually based on the previous day’s closing price. Not so with a website; they keep tabs on the market value minute by minute. That’s crucial, because gold can rise and fall in value considerably over the course of a day’s trading.

That’s why the spot price — the price quoted for immediate purchase and settlement — is important to the investor. If you keep an eagle eye on the spot price and move quickly, you can lock in a good price, literally on the spot.

Bid, Ask, and Spread

On most quote tables, you’ll see two columns called Bid and Ask. The Bid is the highest price a purchaser is willing to pay for the gold. It’s almost always lower than the Ask, which is the price the holder is offering to sell at.

The difference between Bid and Ask is called the Spread. As a rule, the more liquid an asset, the lower the spread. Gold bullion is very liquid, so it has a tiny spread, rarely exceeding one-tenth of one percent. As of this writing (August 2010), the spread is about 0.08%.

Pricing index

A pricing index or price index (the terms are interchangeable) is an index that tracks price changes in a commodity or group of commodities. For example, the infamous Consumer Price Index tracks the costs of a fixed “basket” of commodities, usually including food, utilities, and transportation.

A gold pricing index is just a list or graphic representation of the changes in gold prices over time. Often it takes the form of a line chart, with the main line showing the actual price changes, and secondary lines charting Bid and Ask prices.

Don’t Confuse the Spot Price With Actual Cost

It would be wonderful if you could pay spot price for bullion, but that’s not likely to happen. You see, spot price is for the big boys in the pits at the NYSE. Commodities never actually change hands there — any more than cash does when you pay a bill with an electronic funds transfer.

So for everyday Joes and Janes, the spot price is largely theoretical.

The private investor will inevitably have to pay a premium on gold bullion. So if spot price for gold is $1210 and you go to a dealer expecting to pay just that for a one-ounce Gold Eagle, prepare to be disappointed, because you’ll certainly pay more.

The above-mentioned $1210 was the closing price for gold on August 12, 2010. However, a quick perusal of vendor offerings online revealed premiums varying from 4% to 24%. That is, the total cost for an ounce of gold bullion varied from a not-so-bad $1263 to a whopping $1505, depending on the vendor.

Incidentally, that cost doesn’t include shipping, insurance, or any other price the vendor wants to add.

So don’t expect that you’ll ever pay spot price for bullion in any form. You may, however, be able to drive the bullion price a bit lower if you buy coin in bulk, or purchase bar bullion instead.

Of course, there’s more to buying gold bullion than simply understanding bullion price terms. Find out exactly what you need to know by subscribing to my free Mini-Course and newsletter, the Gold Minute.

What else would you like to know about bullion prices? Let me know by adding your comment below…