Investing in Gold: Why does gold for delivery cost more than 'spot' price?

When a person is looking to buy gold they should expect to pay a premium over and above the spot price of gold. Stock exchanges price gold and silver as any other commodity on the trading floor, but if one is looking to take physical delivery of gold the spot price is just a starting point. Premiums for physical delivery include manufacturing, storage, and shipping costs as well as commissions by those selling the product.

Most of the major bullion products for gold are done by international mint facilities. The United States mint produces both the American Gold Eagle and Buffalo coins as bullion products. Other bullion products produced by world mints are Canadian Maple Leafs, Chinese Pandas, South African Krugerrands, Australian Nuggets and Kangaroos, Austrian Philharmonics, along with a few other various mints. All of these bullion coins will have denominations because they are struck as coins. Mints usually produce one ounce, half ounce, quarter ounce, and tenth ounce pieces, but are not limited to just those sizes. In fact in 2007 the Royal Canadian Mint minted several 100 kilogram (220LB) gold coins with a face value of one million Canadian dollars.

Gold is also produced in bars by large bullion companies such as Johnson Mathey, Englehard, Credit Suisse, and Pamp Suisse. The most popular sizes for these products are one ounce, ten ounce, one hundred gram, and kilo size bars. Bars are made as small as 1 gram and as large as 400 ounces. These products do not have a denomination as they are not minted by a country, but rather by privately owned mints.

Whether struck by a private or government mint gold in deliverable form will cost more than the spot price as quoted by the exchange markets. Premiums will vary with supply and demand as well.

As 2009 draws to an end the U.S. Mint has ceased to make the Buffalo and is limiting out put of the Eagle. In spite of the mint producing less demand has not waned, and so the premiums for those competing to buy these coins has increased by at least two percent.

Having physical gold may also bring you a premium as a seller. Some of the more popular gold products will actually net a person more than the spot price of gold if selling to a reputable dealer that is in need of the product.

If you are looking to buy gold expect to pay a premium for a product that you can hold in your hand. But also realize you may net more than spot when you sell it as well. Just ask your bullion dealer what their buy/sell spread is. The profit margin on gold bullion products is usually just a few percent.

• Allen Rowe is the owner of Northern Nevada Coin in Carson City.