What Is the True Cost of Gold?
Is this question even adequate to address the realities of pricing? When you buy gold, what exactly are you paying for?
These are tricky questions for several reasons:
- The cost of gold is never fixed—it’s subject to fluctuations based on supply and demand.
- The cost of gold depends on what the market is willing to pay for it—buyers and sellers on the commodity level negotiate a favorable price they agree on, and that moves the price.
- When you pay for a gold coin or bar, you are paying not only for a “product” but a share of the entire production “process.”
This last point is something many customers miss.
Paying for a Product and Process
Let’s say you could buy boxes of breakfast cereal wholesale to save money versus buying it at the grocery store, where price markups cover the store’s costs and produce a profit.
Even at wholesale, you’re buying a product that has manufacturing costs embedded into the price. A farmer had to pay various resource and labor costs and a manufacturer had to pay additional costs to turn the grains into a consumer-ready box of cereal.
By the time the manufacturer has determined the price of the cereal per unit, it must include the cost of production plus a markup to generate a profit. Wholesale or not, consumers are paying for the entire process of creating a product.
Gold coins and bars are no different when it comes to supply chain costs finding their way into the final price tag.
The Gold Supply Chain
What’s the process you’re paying for when you purchase a gold product? Let’s look at the supply chain from ground to final sale.
1. Local and National Permits for Gold Exploration
The gold supply chain begins in the region where it’s found. Before setting up mining operations, companies need permits from the government.
Mining operations and ownership are regulated by government entities and can affect human working conditions, environmental impact, and safety protocols. Regulations may be specific to an area or align with international standards and vary by country or change based on political climate and regime.
The cost of obtaining permits to mine gold will vary by country but will find its way to the price of gold.
2. Mining Operations
Gold can be found in hard rock deposits or alluvial deposits. Miners can find, on average, one to 20 grams of gold in one ton of ore.
Mining is an extensive operation requiring a sizable workforce, employing around 7 million worldwide. An even greater number—around 100 million people—work in the “artisanal and small-scale mining industry (ASM).”
These smaller independent miners range from informal digs to smaller operations. ASM is an active industry in around 80 countries and produces 20 percent of the world’s gold supply. It may coexist with or compete against large-scale mining (LSM). ASM miners are less equipped, so they produce less than LSM miners.
The mining process typically involves digging, transporting, crushing, washing, and filtering gold ore. The sediment is then processed with mercury or other chemicals to yield a gold-chemical amalgam, which is then sold to local gold traders.
LSM companies have the advantage of machines to crush and mill the rocks to powder or slurry form, and they can use sodium cyanide to yield impure gold.
The cost of production plus the desired premium, which varies from miner to miner, will constitute the SPOT PRICE offered to local traders/exporters or to refiners. The cost of production and premiums will also vary.
3. Local Traders and Exporters
The trading process can comprise many different steps and variations. The price of gold will vary depending on who—miner, local trader, local government—determines the pricing and the original price set by the miner. A reasonable markup estimate is around 2 percent.
The transportation of gold from mine to smelter can vary widely across ASM and LSM operations. The cost of labor, energy, insurance, and possibly taxation, will be tacked onto the price—a markup of about 1.5 percent.
5. Smelters and Refineries
In the smelter process, gold is released through the process of melting the yellow metal and subjecting it to a chemical process to extract the metal in a semi-pure form. The result of this process is doré gold—a semi-pure alloy of gold and silver.
At this point, the purity will vary. Refineries then subject the gold to further treatment to bring its purity to 0.999-plus. Also called “gold blanks,” these are the products that are sold to mints for the purpose of striking gold coins.
Prices vary by refinery, but bars usually see a 1.5 price increase; blanks sold to mints can yield a larger percentage.
A mint produces “legal tender” coins for circulation and also precious metals coins and bars for collectors and investors; examples include the U.S. Mint, Canadian Mint, UK Royal Mint, and Australian Perth Mint. A mint’s processes can raise the cost of each unit by 5 percent to 15 percent.
7. Gold Dealers
At GSI Exchange, our commissions account for costs in restocking, insuring, implementing strict quality checks, and hedging our stored gold (to not lose money on our inventory). And that’s just the product end of our costs. Like every other business, we also have various administrative costs that must be considered. Quality service relies on a strong team, and we always strive to provide optimal service to our customers.
We do our best to provide competitive pricing as it’s in both our and our customer’s interest to offer the best quality precious metals products at the best available prices.
The Bottom Line
The price of precious metals will fluctuate on the market side, depending on supply and demand. That’s just the basic law of economics. But what some customers aren’t typically aware of are the costs that go into a precious metals product before it reaches the market. Hopefully, this helps give a basic understanding of the gold supply chain and the total cost of the process that finds its way into the final price tag.
Learn how to create a Gold Backed Bank Account or Gold Backed IRA today! Contact us at 833-GSI-GOLD and you’ll receive a complimentary copy of our ebook “How to Set up A Gold Backed Bank Account” or our “Guide to Buying Precious Metals with Your IRA,” free of charge.
GSI Exchange is a retail gold and silver dealer in Palm Beach Gardens, Florida, and does not provide tax, legal, or investment advice. Any information communicated by GSI Exchange is for informational purposes only, and should not be construed as tax, legal, or investment advice. Whenever making an investment decision, please consult with your tax attorney or financial professional.
By Anthony Allen Anderson, senior partner
The Epoch Times takes no responsibility for the claims, promises made, or the quality/reliability of the products or services offered herein