Monday, March 23, 2009

Precious Metals on Ebay

Maple Leaf auction and Silver Eagle dollars auction on Ebay
It's normal that gold and silver coins fetch a premium above their spot gold price, and that's to be expected since it does require money to manufacture, deliver, and stock the items. But lately the premiums have been increased because of ballooning demand for physical bullion. Lately I've been more interested in buying silver than gold, and I've been pretty surprised by the premiums especially on silver. It seems that there are almost two separate spot prices for silver, one official spot price which takes into account all silver that is accounted for on paper and on computer screens (ie. silver that may not physically exist but is simply owned as a promise to deliver), and a separate, unofficial market-driven spot price for physical silver bullion. Buying silver coins online in the USA, 1 oz bullion coins typically cost around $18 before shipping. I hear reports that buying in store costs over $20 in the US. Privately-minted silver rounds seem to be a couple of dollars cheaper.

At first I felt I was being ripped off when paying such premiums, that the shops were trying to gouge me. But when looking online at Ebay and other auction sites Y (Yahoo Auction is popular in Japan and some other parts of Asia) I saw that the going rate on those sites is just as high as the premium price charged in shops. I thought that this was a result of overzealous aution bidding, which might be partly true, but the prices are quite consistent, which suggests that on Ebay we can determine the real market value of physical bullion. And investors know, either consciously or intuitively, that physical bullion as a tangible asset has more value than a paper promise to receive bullion. That's why the market value of physical bullion is above the official spot price.

Unrecognized silver rounds and bars (unrecognized meaning that they are produced by private mints that are not as widely known as the state-run or other major mints) seem to go for around $17-$18 on Ebay, and well-known bullion coins like American Eagle Silver Dollars and Canadian Silver Maple Leaves seem to command $20-22. That is relative to the current silver spot price of approximately $13.85. Most of the sellers seem to be offering free shipping within the US, or a small shipping fee even on an order of a single coin.

Let's compare those price trends with the prices on a big online bullion dealer. At Kitco.com you can order 1 oz Silver Maple Leaf coins for $18.13 right now, and the somewhat less recognizeable but still popular Vienna Philharmonic silver coins for $16.28. These are obviously cheaper than the price trends on Ebay, but you have to pay shipping at a flat rate of $30, no matter how much you buy, plus insurance ($24 per $1000 of silver, but only $4 per $1000 of gold). So when buying small quantities of silver, the higher premium price on Ebay is made up for by cheaper or free shipping. It seems like here the market has naturally determined what individual investors are willing and able to pay for small quantities.

Perhaps the most important feature, though, of online auctions is that you can recoup the premium when you sell. When you sell back to Kitco, you get hit by the buy-sell price spread. For example, even though they charge you $16.28 for a Vienna Philharmonic silver coin, they will pay you only $13.66 to buy it back. But on Ebay or another auction site, there is no spread. Every transaction is independent of all others. And since the premium price trends seem very consistent, you can sell your bullion at a similar premium to the one you bought it at. I'm no expert in online auctions, but in the future when I am ready to sell some of my precious metals stash, I will look into selling via auction to get the full market value of the coin without paying a shop's overhead through spreads and fees.

After doing some shopping on ebay I appreciate its peer to peer quality so much more than before. When trying to order from a large vendor I'm asked to use a cashier's check or send a wire transfer and pay a large fee for the wire transfer, fill in all kinds of personal information, get faxes and verification forms and other things to make sure I'm not an international criminal or terrorist or whatever. On Ebay you simply decide how much you're willing to pay for the bullion item, and enter your paypal address then presto. The goods are on their way. This is the way the free market should be.

2 comments:

Mike said...

I skip Ebay altogether and trade (sometimes sell, sometimes buy) with the Silver and Gold Exchange at http://SilverAndGoldExchange.com They work personally with buyers and basically call you when something you like comes in. They conssently sell for less than ebay or dealers because they buy from the public and flip what they buy the same day at a small margin.

GoldMarketBlog said...

Thanks for the tip, Mike. I will have a look over there. Ebay definitely has its downsides, which I'll write about in the next entry!