Buy-Sell Spreads in Precious Metals

Greetings my upwardly mobile friends,

I decided to write this post about buy-sell spreads because the #silversqueeze trend has been going on for more than a month and because I touched on this topic when I wrote about buying physical silver last year.

The problem with investing in precious metals, but silver in particular, is a little thing called the Buy-Sell spread. The price you buy is generally higher than spot price. The difference between spot price and your retail purchase price is called the premium. However, when you sell silver, you don’t get that premium back and you usually get 90% of spot price in a retail setting.

So what does this mean? Well, it means physical silver is cost inefficient for investing. I’ll show you.

Let’s say spot price is $26.68 per Troy ounce (the spot price on February 27, 2021). Let’s say a typical premium is 15%. That means the cost to buy a Troy ounce would be $30.68. Let’s say you go to sell the same Troy ounce to the retailer on the same date, they’ll probably pay you $24.01. You instantly lost $6.67 with no change in spot price. Want to make some money investing in physical silver? You’ll need the spot price to increase from $26.68 to $34.09 to break even if you’re selling physical silver back to a retail establishment at 90% of spot. That means you need the price to go up almost $8 just to break even. Let that sink in. You need a massive spot price increase just to break even.

It gets even worse if you live in a place like New York where there is sales tax on silver bullion or the UK where there is VAT on silver bullion. In New York, you can expect the state and local sales tax to increase the buy price by almost another 9%. That $26.68 spot price costs $30.68 with a 15% premium, but it’s $33.36 with 8.75% sales tax. Consequently, you need an even bigger price raise to break even when you sell.

Buy-Sell spreads are tough news when compared to the heady talk about a #silversqueeze. There is more tough news when you learn that many retailers have higher premiums than the hypothetical 15% I used in this post. Right now, a generic silver Troy ounce round is selling on Apmex for $31.80, that’s more than a dollar higher than the price in my example.

In theory, you can limit the headache of these buy-sell spreads by buying and selling in private transactions. However, that increases you risk of getting fake silver, fake weights, or just getting scammed altogether.

I like silver. As I mentioned in my past post, I have some and I enjoy it. A huge price increase would benefit me as I bought silver at prices much lower than the current price point. Nevertheless, people getting into holding physical precious metals should go into it with their eyes wide open. Ignorance really can cost you a lot of money. There may be a lot of upside, but there is also a lot of downside. Silver prices are volatile.