Bullion Buying

Calculating ROI

Whenever you buy or sell commodities (or currency at the airport), you expect there to be a spread between buying and selling prices. In market terms, these are called ‘Bid’ and ‘Ask’ prices. The Bid is the highest price that bidders will pay you when you are selling: while the Ask is the lowest price at which a seller will sell to you.

The bid and ask prices are normally close together (known as a 'narrow spread') in the bullion markets ... on the screen - and of more importance than the difference between the buying and selling prices is the relative level of the market price when you invest (or when you invested) compared to where you (or the forecasters) believe the price will go in the future.

What is important is the the premium and discount charged on the assets you buy. Whereas there is a relatively fixed rate to be charged for individual coins on a given day, the rates for different bars will vary according to their size. There is a premium to be paid for small individual bars such as those that are bought by individual investors, to cover their higher cost of production relative to their bullion weight and value. This puts some people off bars: but it means that at sale time you may be able to obtain a correspondingly higher price.

Your actual selling price will always be reduced to some extent by the percentage commission charged by the dealer, but you should ideally be looking to sell at a time when your capital appreciation is much higher than any transaction costs. Selling through the same dealer with whom you purchased in the first place is usually the most cost-effective route: when choosing where to buy in the first place it is a good idea to check that the company is long-established and is registered with the local financial services authorities, so that they are likely to be around when you want to sell back to them!

When you have been holding your investment for some time, particularly over years, you cannot just evaluate the ROI (Return on Investment) on a simple comparison of purchase and sale prices:

  • you have to adjust it to an annual rate of return to get a realistic comparison of how well it has performed;
  • you should correct it for inflation (in order to compare it to other ways you might have spent your money);
  • build into any comparison how much tax is applicable (if any) to your bullion investment versus any alternative options; and
  • you need to bear in mind that interest or dividend-bearing investments generate compound interest on a regular basis, whereas bullion is a store of value with the possibility of capital appreciation.

Of course, bullion does not provide income while held: but then neither does it attract any income tax.

At the time of writing, even on a simple return comparison, gold has been an excellent choice in the last decade. US dealers Blanchards point out the following comparison:

$10,000 invested in gold bullion in 2001 would have grown to $43,330: a simple rate of increase of 333%.

Whereas the same amount invested in Standard & Poors Index stocks would have grown by a paltry $230, or 2.3%. (Dividends would most certainly not have made up the difference). Stocks spent most of the 10 years in negative territory: gold only dipped in 2002 and later flatlined in 2010, before growing further in 2011. The rest of the years saw solid increases: a good example of how a ‘volatile’ commodity can look anything but that if you adjust the figures to create an annual analysis.

Where will bullion prices go in the future? Any opinion is of course speculative but in December 2012 the Bank of America published this forecast -

"We expect large-scale policy easing by the Fed and the ECB should push gold prices higher."

They forecast that gold prices will reach $2,000/oz. in 2013 and $2,400 by the end of 2014.

Due to this expected further quantitative easing by the U.S. Federal Reserve, as well as supply constraints, goldsilverplatinum and palladium (as well as copper) will outperform other commodities in 2013, their analysts predict.

Interestingly, they further suggest that a China which will recover its growth impetus will ignite increased industrial and official reserve demand, and that the likely appetite of emerging nations generally for gold will set a floor for gold at around $1,500, regardless of the activities of individual investors who will become less important, but who will nevertheless benefit from the market prices.



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