How Do Gold Dealers Make Money?

With the proliferation of gold buyers one would think, the buying and selling of gold, any gold, is a lucrative business. This is not true. One common misconception is that gold buyers make tons of money, especially when the price of gold goes up. The truth is that gold dealers take on all the risk because of the volatile nature of the precious metals market.

So how do gold dealers like the Australian Bullion company make money?

There are two types of precious metals dealers: the dealer that stocks its inventory in-house, handles its own orders and shipping. Those that hold inventory are said to be hedging or holding out until gold reaches a certain point. Buying gold can be likened to taking a long position. On the other hand, when you bet that the price of gold will decrease, then it can be said the market is being shorted.

Dealers know what to look for in the market, to spot those things that can influence the price of gold. Profit is important and dealers like Australian Bullion Company have been in the business for years know the signs to look out for. They have seen the storms, been caught up in a couple of them before and they can identify the markers and triggers that bring about change in the price of gold.

The spot price:

It’s not all about the spot price. In fact, the spot price plays a little role in how gold buyers make money. This is because the spot price charged to customers is the same as the spot price dealers pay when they buy gold from a wholesaler. This means they pass the hedging responsibilities on to the wholesaler while they make money on the premium. Either way, this is not a fool proof system because many gold dealers lock the customer to a specific price before the transaction even goes through. The price of gold is always fluctuating so one of the parties stands to lose should the price change significantly. Buying bullion is nothing like buying a book online. There is always a risk that the order will be cancelled and cancellations van cost the dealer thousands of dollars.

So how then does a gold buyer make money?

Gold dealers make money on the premium charged over the spot price. For instance, you may pay a $50 premium over the spot price for your Krugerrand, Australian Kangaroo. American Eagle or some other gold bullion coin you choose. This would mean the dealer makes $50 per coin, but it is not that as straightforward as that because dealers themselves do not buy coins at spot prices.

Mints like Perth Mint or the Royal Australian Mint have to make up for the cost of melting, refining and minting gold bullion so they may charge a 3% premium to wholesalers they sell their gold to. Mints have a list of authorised dealers that they sell this gold to the Australian Bullion Company is a Perth Mint authorised dealer. When you buy gold bullion from such a dealer they may have paid $35 to $45 over the spot price. You may be surprised that buying a 10 coin set valued at $15,000 would only give that dealer a profit of about $150 – just 1% of the price!