We were recently asked to explain how we calculate our prices for buying precious metals from our customers, so we thought we'd explain in a transparent way, how it is that we work this cost out using bid/ask prices.
What is the Bid/Ask Price?
Firstly, there isn’t a single mid-price when you come to sell your bullion. The spot price has 'bid' and 'ask' prices attached to it to see the highest and lowest offer prices that bullion dealers will give you for your precious metals at that specific point in time.
The bid and ask prices imply the costs of trading and are determined by supply and demand. The prices are also set by market powers and influencers. For example, in precious metals markets, these indicators can be clearly found on the Kitco website.
What is the Bid/Ask Spread?
The highest price a dealer is willing to pay for your precious metals, and the lowest price for which a seller is willing to sell it for, are the bid/ask prices. The difference between these two price quotes is called 'the spread'.
Examples of spreads for electronic transactions:
- For gold, if the bid price is £1141.25 and the ask price is £1142.06, the spread price will be £0.81.
- For silver, if the bid price is £13.20 and the ask price is £13.28, the spread price will be £0.08.
- For platinum, if the bid price is £694.33 and the ask price is £698.35, the spread price will be £4.02.
- For palladium, if the bid price is £1216.48 and the ask price is £1236.59, the spread price will be £20.11.
- For rhodium, if the bid price is £2622.83 and the ask price is £2783.74, the spread price will be £160.91.
The size of this spread helps to indicate the liquidity of the metal as well as the transaction cost. The lower the spread, the more liquid the market at that point in time. Those assets with a high spread are more volatile and less liquid. Rhodium has very little liquidity, hence a much larger spread.
If you look at the below Kitco graph below, you'll see that the market bid/ask price is several percent lower than the 'low' and 'high' prices. As bullion dealers, when we buy or sell precious metals, it's some way above or below each of these prices, making the spread that we are exposed to, larger.
Selling your physical metals
At Bleyer, when we want to sell a unit of bullion (bar or coin), we'll put a markup on the price before making it available to purchase from our website. This is calculated based on the cost to us and the 'ask' price. This price would be calculated as:
'Ask' price + percentage markup (dealing charge) + fabrication charge + operational costs + profit = Bleyer's selling or 'retail' price
When we buy bullion from a customer, we have to consider how quickly we can sell it on. If we cannot sell something to another customer, we may choose to sell it back to a refiner. This is based on the 'bid' price and can be calculated as:
'Bid' price - percentage markdown - operational costs = Refiner's buy price
We use bid/ask prices to buy and sell precious metals all the time. Keep your eye on these prices if you're looking to sell your bullion, as these numbers can give you a realistic view of what prices you can expect to receive.
What does this mean for investors?
The bid/ask spread can widen dramatically during periods of illiquidity or market turmoil, since traders will not be willing to pay a price beyond a certain threshold, and sellers may not be willing to accept prices below a certain level.
To investors, a high bid/ask spread may sometimes indicate early, risky, or attractive stages of an asset. Major currencies are considered the most liquid asset as the bid/ask spread in the currency market has one of the smallest in the world (one-hundredth of a percent) as long as you are trading high volumes of electronic, not paper money. Less liquid assets, such as small-cap stocks, may have spreads that are equivalent to one or two percent of the asset's value.
By choosing the right stocks at the right moment, investors can take advantage of a low bid/ask spread. Always do your own research and if you know what you're looking for, analyse spreads and arm yourself with insider market knowledge.