Spot Price and The Cost of Instant Gratification.
The spot price of precious metals is generally well known. It is quoted on the news several times a day and can easily be researched online. But what is the spot price, and why does it differ from the price we are quoted when we look to buy physical bullion?
The spot price of precious metals is largely governed by investment demand and is driven by demand for safe-haven assets and gold futures market speculation. It represents the current purchase price of a troy ounce of precious metal for immediate delivery. In short, it serves as an indicator of what you can expect to be paid immediately when you sell your physical bullion to a reputable dealer.
However, the parties who have the most influence over the spot price of precious metals are generally not actually exchanging physical precious metals. Instead, they are using derivative contracts representing the commodities to determine the physical price for bullion.
If you find this confusing, don’t worry. You are not alone.
Fortunately, thanks to the spot price determined by these parties’ activities, buying physical bullion in a personal capacity is a much simpler process.
The beauty of the spot price of precious metals is that it is constant across the world, which means that you can expect to receive roughly the same amount of money whether you are selling in Cape Town, Joburg, New York, or Dubai. This is just one of the many reasons why physical bullion is a fantastic vehicle to protect your wealth. Regardless of a country’s local financial and political situations, your physical bullion retains its value across geographical borders.
Why Can’t I Buy Bullion at Spot Price?
In order to explain this, an analogy is in order.
If we were to take a brand-new car and break it down into its most basic components, the value of those components would be far lower than the actual price you will pay at a dealership. It was estimated that in May 2021, the cost of raw materials for an average US vehicle was roughly $4,125 per unit. Yet, the average US vehicle sells for over $45 000.
Why?
Because parts need to be designed, manufactured, and assembled. Workers need to be paid. Machines used in manufacturing need to be built and maintained, and the finished product needs to be shipped to its destination. Additionally, auto manufacturers are constantly investing in research and development. There is skill and labour associated with every part of the process, making the price of the finished product much higher than the value of its raw ingredients.
Similarly, the spot price represents the value of the physical bullion. The reason why a dealer’s price is generally higher than spot is that it incurs several costs on its journey from the ground into your hands. These costs can include:
- Manufacturing costs (labour, equipment, expertise)
- Shipping and insurance of medallions and bars.
- Marketing
- Customer service
- Storage
- Office and/or warehouse expenses
This leaves one wondering how it is possibly to grow your wealth by investing in physical bullion. The answer is simple: Patience.
Investing in physical bullion is never about the short-term return on investment. It is about building long-term, stable wealth. If you are in the game of instant gratification, then physical bullion is likely not for you. If, however, you are interested in protecting your wealth for the years to come, your retirement, or even your children and grandchildren, then there are hardly any investments that can match the potential of physical bullion.
What is the true cost of instant gratification?
One of our favourite illustrations about the cost of instant gratification is a short video produced by Media analyst Mark Dice. Although the video is now seven years old, its message still holds as true today as it did back when it was released. Mark took to the streets and offered passers-by a choice between a free Hershey’s chocolate bar, or a free 10-ounce bar of silver. Without fail, people chose the chocolate bar, and at the end of the day he was left with the bar of silver still in his hand.
What makes this so striking is that back in 2015 when the video was made, that 10-ounce bar of silver was worth R1835. For comparison, Walmart currently sells a King-size Hershey’s bar for roughly R25. Now while it is true that not everyone knows the value of silver, the participants were given a chance to find out. Mark prompted them to go to a coin shop across the street and have the bar of silver verified, but people were happier accepting the chocolate instead of taking 2 minutes to find out that he was in fact offering them something of much greater value.
Fast forward seven years, and the lesson becomes even clearer. Had you sold the silver bar on that day, you would have pocketed R1835. But had you dropped that silver bar in a drawer and forgotten about it until now, you would find that its value had grown to R3502. That is a massive price to pay for the instant gratification gained from a bar of chocolate.
This is a simple illustration, but it underlines the importance of patience when dealing in physical bullion. It is not a vehicle to quick gains, but rather a way of preserving and growing your wealth in the long term.
The reward of patience.
It might seem like a big ask to wait 20 years to see a return on an investment, but when you crunch the numbers, the returns are staggering. In 2001 (yes, that was already more than 20 years ago) the Rand traded on average R7,77 to the US Dollar. 20 years later in 2021, it traded at an average of R14,79. The average spot price of Gold in 2001 was a mere $271,19, while in 2021 it averaged $1,798.89. This means that in 20 years the spot price for an ounce of gold went from R2107,15, to a staggering R26 472,47 – an increase of 1156.32%.
It is therefore imperative to change one’s mindset, move away from the desire for instant gratification, and understand why patience is truly a virtue. Besides, the original Monsters Inc. came out not that long ago, right?
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