Something which bothered me, how does PM industry make its money? Surely for a Silver coin to be sold for $2 to $5 above spot someone is not selling at spot to the upstream. So what is the secret to business model.
Just to expand A mine can sell below spot since its cost per ounce is what it cost interest, wages and taxes etc. Once a refiner buys it and refine it, surely it is selling silver at spot, so where is the mint and dealer making its margin
I saw an article at least 18 months ago which explained how some mines (I can't recall if the silver they sold was secondary metal) are producing an ounce of silver for as little as $4 USD an ounce. Now I highly doubt the figure was the all-in cost and don't know if the claim was even true, but if it is true then I suppose we might be able to see how very small premiums can still mean profit for the retailer. .
Most Silver mined is a byproduct of mining for other things, therefore it's basically free cash for the miners involved. Refining, whilst capital intensive does benefit from large economies of scale. Dealers rely on turnover to make a buck. All parties involved (should) hedge therefore are generally unaffected by spot price movement.
Say BHP mines copper and gets silver as a by product they sell to to a refiner (do BHP sell at spot?); The refiner ZZZ pty Ltd refine and sell to a Mint; Do ZZZ sell at spot? Say it is Perth Mint who bought the 999 silver bar and they have an inhouse, blank maker - so they cut out one layer ie Blank Making. Perth Mint just sells online shop adding a fabrication cost. (basically cutting out another layer - but if selling to a dealer do Perth Mint sell at spot) Spot is $24.37 on SS website, Perth Mint selling one 2016 Kangaroo for $29.68 - profit $5.31 But what if all the upstream layer were separate businesses which is much more common I think than.... The mine The refiner The blank maker The Mint The dealer ...That is 5 layers of businesses who need to make a profit, (Could argue 4 as the miner is in a different category) but from the periphery unless mine to dealer to investor/stacker silver is being sold and traded in volume at less than spot, I cant see how it works.
Have often thought the same thing when seeing posts complaining about premiums. Even if you're a dealer simply buying 10% below spot and selling 10% above spot, that margin would send most businesses broke in fairly short order. I can only imagine that the average dealer probably employs very few people relative to the volume of sales, unlike most retail businesses.
I wouldn't even contemplate becoming a brick and mortar dealer. Without knowing the details, since the little I know is from the forum, it looks like a mugs game.
Anything is a mug game if we don't know what's the inside is! I was always wonder the same thing with the amount of car wash springing up near my place and untill I found out their cashflow, then I realised it's a pretty good business!
If you were a miner, why would you sell your gold or silver below the current market spot price, no matter what it cost you? You wouldn't and they don't. Refiners have to pay spot and separately they charge a refining fee, which is independent of spot price and is a highly competitive market so not much can be charged. So a refiner gets the metal basically at spot with a small profit from refining. Cost of wholesale bars, eg 1000oz silver, in bulk to a mint is in the order of a few cents per ounce at best. Thus pretty much all of the $2-$5 per ounce investors pay has to be shared between mint and distributors and retailers. Knowing all the processes that go on to make a coin, I was always amazed that the Perth Mint ever made money selling bullion coins, but it does because of scale - as long as you are putting through hundreds of thousands of coins you can spread the cost of machines and staff out.
Wow, thanks Bron for the insight, that is one tough business model. Also I presume every layer have to hedge against prices going against them. It would not matter at which layer above the miner it is, $2 drop over a course of week would be devastating if you have a tens of thousands ounce in the factory or transit.
Yep, everyone has to be hedged, either using futures, borrowing (leasing) metal, or for smaller players, the stock in the business is their personal PM investment.
