Why is physical gold more expensive than the spot price?

Physical gold is more expensive than the spot price because the spot price is a wholesale price. That price applies to large trade bars of 400 troy ounces, roughly 12.4 kilograms, which are traded between banks and professional parties. If you buy a 10-gram bar or a gold coin, you are buying a different product. It must first be melted down, struck, checked, packaged and delivered with insurance. The difference between these prices is called the premium.

The premium is therefore not a surcharge that a dealer simply adds on. It is the difference between raw gold in wholesale form and a finished product that you hold at home. In this article you will read what the premium consists of, how to calculate it yourself, and why the price varies by product, size and supplier.

Why is gold so expensive? Two different questions

Anyone wondering why gold is so expensive usually means one of two things. Sometimes it's about the gold price itself, which has risen sharply in recent years. That development is related to interest rates, inflation, the dollar and geopolitics. You can read more about that in our article on the influence of interest rates, inflation and geopolitics on the gold price.

This article is about the second question: why buying gold in the form of a coin or bar costs more than the price you see on a chart. That difference is independent of the level of the gold price, and is present even when the price is falling.

What exactly is the spot price?

The spot price is the current market price at which gold is traded for immediate delivery. That price is determined by global trading on markets such as London and New York, and moves throughout the day. It is usually quoted in dollars per troy ounce of pure gold.

The spot price is slightly different from the LBMA Gold Price. The latter is a benchmark fixed at set times during the day, while the spot price moves continuously. Both are reference prices for the metal, not a shop price for a coin or packaged bar.

How that price is formed exactly is explained in our article on the spot price and how it is determined. You can see the current level on our page with the live gold price.

Why you as a private individual never pay the spot price

The spot price belongs to a product that you as a private individual do not buy. International wholesale revolves around Good Delivery bars of about 400 troy ounces, or roughly 12.4 kilograms. Those bars are traded between banks, trading houses and institutions, and are stored in professional vaults.

If you want to buy 10 grams of gold, that wholesale gold must first be transformed into another form. A producer melts and refines the metal, strikes or casts small bars or coins from it, checks weight and purity, packages it and assigns a serial number. Then it is transported insured to the dealer and eventually to you. Each step costs money and time.

So you are actually comparing a raw material with a finished product. The same applies to coffee beans versus a cup of coffee: the same raw material, a different price. That is why mining costs are not listed separately in the premium. They are already included in the spot price of the metal itself.

What does the premium on gold consist of?

The premium is the sum of all costs to convert wholesale gold into a tradable product for private individuals. Those costs are roughly as follows:

• Production: striking or casting bars and coins by a recognized producer, including stamping and finishing.
• Inspection and certification: determining weight and purity, and applying a serial number.
• Packaging: a sealed blister or assay card protects the product and makes authenticity verifiable.
• Insured transport: gold travels securely and insured, often over long distances.
• Inventory and financing: a dealer holds insured inventory, and that inventory must be financed.
• Dealer margin: the fee for service, support and availability.

Important to know: the premium is not entirely the dealer's profit. The producer and any distributors already charge their own mark-up, so a dealer buys the product above spot value. From the remaining difference, staff, systems, insurance and customer service still have to be paid.

What is not included is VAT. Investment gold is exempt from VAT within the European Union, provided it meets the legal requirements. That exemption does not automatically apply to all gold items, such as jewelry.

How do you calculate the premium on gold?

You calculate the premium by comparing the product price with the spot value of the pure gold in the product. To do this you use three steps:

• Metal value = weight of pure gold × spot price per the same unit of weight
• Premium in euros = product price − metal value
• Premium in percent = premium in euros ÷ metal value × 100

Always use the same currency, the same unit of weight and a spot quote from the same moment. Also note whether a website shows a buy price, sell price or mid rate, as they each give a different result.

An example calculation

The amounts below are a fictional example. They do not reflect a current gold price or rate from The Silver Mountain.

Including the shipping costs, you pay in this example about 4.7% above the metal value, while the premium on the product itself is 4%. This distinction is useful when comparing. A lower product price can still result in a higher total amount because of separate shipping costs.

Always calculate using the fine weight

For the gold value, only the weight of pure gold counts, also called the fine weight. This makes a difference for coins. A gold Maple Leaf and a gold Krugerrand of 1 troy ounce each contain approximately 31.103 grams of pure gold. The Krugerrand also contains copper and therefore weighs more.

That extra weight is not gold, so do not multiply it by the gold price. Always use the specified fine weight of the product.

Why small gold bars are more expensive per gram

The smaller the weight, the higher the premium per gram. Striking, inspecting and packaging a small bar cost almost as much as for a large one, while those costs are distributed over much less gold. The costs therefore do not decrease proportionally with weight.

The ranges below provide an indication of how the premium relates to the size.

Why gold items differ from each other

Even within the same weight, items can differ in price. Four things play a role.

• Coin or bar: A gold coin does not automatically have a higher premium than a bar with the same amount of gold. A common investment coin from an earlier year can be sharply priced, while a new, individually packaged bar may be more expensive. Therefore compare concrete products at the same time. The choice between round and rectangular says little about which option is more advantageous. You can compare the possibilities at our gold coins.
• Manufacturing method: Cast bars are simpler to make than struck bars with a smooth surface and a detailed design.
• The producer: Our gold bars come from refineries on the LBMA Good Delivery List. That listing applies to the refinery and the large professional trade bars, and says something about the producer's reliability. A small consumer bar is therefore not itself "LBMA-certified".
• New, pre-owned or special edition: Pre-owned products can have a lower premium because they are purchased via the second-hand market. Special editions with a limited run or a collector design may carry an additional surcharge. You do not automatically get that collector's premium back when selling.

Can the premium rise while the gold price falls?

Yes, that can happen, because the availability of specific products moves differently than the international gold price. A mint may temporarily be unable to supply enough coins to meet demand. Traders then pay more for what is available. That does not mean there is globally too little gold. It concerns a shortage of a particular issue or a certain size.

There is also an arithmetic effect. If the premium in euros remains the same while the gold price falls, that same premium becomes a larger percentage of the metal value. The percentage then increases without the product becoming more expensive.

Is the gold price the same everywhere?

The spot price is almost the same worldwide, but the price you pay in stores is not. International markets are continuously connected, so large differences quickly disappear. On top of that, each country and each seller adds their own premium.

Those differences arise from taxes, import duties, transport distances, local availability and competition. Within the EU investment gold is VAT-free, but outside the EU that is often not the case.

The exchange rate also plays a role: the international price is usually quoted in dollars, so the euro-dollar rate partly determines what you pay in euros. If you look at an offer from abroad, also include transport, any import costs and taxes.

The premium on gold is the difference between the spot price (gold price) and the price you pay for a gold bar or a gold coin.

Do you get the premium back when selling?

The premium you pay on purchase is not automatically returned when you sell. A buyer bases their offer on the prevailing gold price at that time, the product and market conditions, not on your original purchase price. The difference between the purchase price and a dealer's offer at the same moment is called the spread.

That is why it is wise to also look at a current buyback price before purchasing. With us you can sell your gold back to sister company Inkoop Edelmetaal, which transparently publishes the offer price.

A current offer says nothing about a future return, because both the gold price and the terms may change. A complete overview of all costs at purchase, ownership and sale can be found in our article on the hidden costs of investing in precious metals.

How do you compare sellers of physical gold?

A fair price comparison uses the same product, the same moment and the total amount you pay. Check the following points:

• Compare equivalent products: pay attention to producer, fine weight, type, condition and packaging.
• Look at prices close together in time: a price movement can otherwise appear as a difference between sellers.
• Calculate with the same spot quotation: use the same currency and unit of weight.
• Look at the total amount: include separate delivery and insurance costs.
• Pay attention to delivery time: immediately available stock may have a different price than an order with a waiting time.
• Check the buyback price: this way you also understand what you will get back later.

Buying gold at The Silver Mountain

With us you can see exactly which premium you pay per product, so you can compare yourself. Since 2008 we have specialized in physical precious metals and operate carefully and transparently as an AFM-license holder. Our prices move continuously with the market.

You can choose from gold bars from recognized producers and internationally recognizable gold coins. Your order is delivered insured via our own delivery service, or is ready for collection by appointment in Baarn or The Hague.

If you want us to store your gold, that can be done via Edelmetaal Beheer Nederland. And if you sell later, Inkoop Edelmetaal offers you the sales certainty to sell your gold back to us.

Unsure which size suits you? View our Selection Guide here or give us a call, we're happy to think along.

Conclusion: the premium is the difference in product

Physical gold is more expensive than the spot price because you are buying something different than what that price describes. The spot price refers to wholesale bars of approximately 12.4 kilos. Your coin or bar has been produced from that via manufacturing, inspection, packaging and insured transport, and the premium covers those steps.

How high that premium is depends mainly on the size, and additionally on the production method, the producer and availability. Therefore calculate using the fine weight, compare like-for-like products at the same time, include any additional costs and also look at what you will get back later. Then you will know exactly where you stand.