How do the Bullion Dealers make their profit?

[Rubbing Elbows]

Unfortunately sitting at home with the MANFLU & was looking at the different prices of silver fluctuate between the dealers as the price of silver fluctuates.

My question is how do the dealers make a profit or how can they calculate their expected return? Do they basically have to sell almost immediately after they purchase as the price of silver could decrease so quickly & eat into any margin they had calculated or do they get a huge discount buying direct from the mints or bullion makers or are they paid a commission for what they sell. I know when we the public sell back to a bullion dealer they pay less than spot or charge a commission to us but more interested in the new bullion or coins being sold.

 

[Rubbing Elbows]

ok if the price is going up all the time

 

[goldpelican]

There's no commissions, just margins.

 

[projack]

Whatever you sell you replace immediately and you make profit on every sell regardless of the price.

 

[Rubbing Elbows]

There's no commissions, just margins.

So obviously a quick drop in the price could quite easily eat up their margins, seems like a risky business.

 

[Rubbing Elbows]

Whatever you sell you replace immediately and you make profit on every sell regardless of the price.

They would obviously be able to buy in bulk cheaper than the average punter off the street?

 

[projack]

Whatever you sell you replace immediately and you make profit on every sell regardless of the price.

They would obviously be able to buy in bulk cheaper than the average punter off the street?

The sell price always incudes some profit.

 

[Bargain Hunter]

The thing that some people have to remember is it could be days until a dealer recieves newly ordered stock from the Perth Mint and or other suppliers. Also I'm npt convinces they actually make daily orders, why order more of something unless your stock is low. So depending on the turnover of the dealer, and the turnover of that particular item it could be days or even weeks before an order for more of that item is placed.

In the meantime if the price of spot and hence their existing inventory drops that would eat into their margins, and perhaps even cause a small loss during that week.

However if the sitaution is reversed and spot rises substantially over a few days while they are waiting for new stock to be delivered, this increases the margins on their existing stock and profits are higher so it averages out overall. If prices are fairly consistently trending down for a number of weeks or months I think you will find the percentage mark up on spot will tend to rise to give them more cushion/margin to absorb price declines.

This is all just my theories I don't actually know how dealers operate.

 

[goldpelican]

What projack said.

In practice a properly operating dealer could sell an ounce of gold at $1200 he bought the day before for $1300, and still make money.

 

[Rubbing Elbows]

What projack said.

In practice a properly operating dealer could sell an ounce of gold at $1200 he bought the day before for $1300, and still make money.

Is this because on the sale of the $1200 bar, the dealer would automatically/instantly buy the next bar at say $1120, so basically the profit margin is made when you use the money from what you have sold to rebuy immediately, not so much the other way around.

 

[goldpelican]

Yup!

 

[projack]

I bought something when spot was $38 and just arrived yesterday, but I sold that stuff ages ago when spot was $38 so I made profit on that sale, because basically I just replaced my own stack.

 

[hyperinflation]

You can use your existing stock to hedge (Ie, if you just sourced 100 kooks at 35, you offload 100 kooks at 38) or use paper contracts... some brokers let you do this in as little as 500oz (silver) or 10oz (gold) sizes

 

[Cinvalo]

What projack said.

In practice a properly operating dealer could sell an ounce of gold at $1200 he bought the day before for $1300, and still make money.

Is this because on the sale of the $1200 bar, the dealer would automatically/instantly buy the next bar at say $1120, so basically the profit margin is made when you use the money from what you have sold to rebuy immediately, not so much the other way around.

Sorry i don't quite understand.
As an silver investor,
Maybe say i purchase 1000oz silver at spot price $18, market buy price $24, So i spend $24,000 for 1000oz silver. When silver goes up to $48 spot price, my stack worth $48,000(assume selling at spot). If i sell, i made $24,000 double my investment (Assume no CGT).

As a PM dealer,
Say a dealer purchase 1000oz silver at spot price $18, market buy price $24, so the dealer need to spend $24,000 for 1000oz of silver.
Case 1
If the spot price goes down to say $15, the selling price of silver still needs to be above $24 to break even. Otherwise the dealer suffer a loss. Is that the reason why dealer says TBA in their website when silver drop from $50 to $34 last month?
Case 2
If the spot price goes up to say $20, market buy price $26, the dealer can make a $2,000 profit when he sells.

My questions are, in Case 2,
when the dealer sold and make $2000 profit. He now has $26,000. But 1000oz still worth $26,000 at market price.
How can he hold both the goods and earn profit? [Unless he can buy 1000oz below the market price $26.]
Please advice >.<

 

[fishball]

What projack said.

In practice a properly operating dealer could sell an ounce of gold at $1200 he bought the day before for $1300, and still make money.

Is this because on the sale of the $1200 bar, the dealer would automatically/instantly buy the next bar at say $1120, so basically the profit margin is made when you use the money from what you have sold to rebuy immediately, not so much the other way around.

Sorry i don't quite understand.
As an silver investor,
Maybe say i purchase 1000oz silver at spot price $18, market buy price $24, So i spend $24,000 for 1000oz silver. When silver goes up to $48 spot price, my stack worth $48,000(assume selling at spot). If i sell, i made $24,000 double my investment (Assume no CGT).

As a PM dealer,
Say a dealer purchase 1000oz silver at spot price $18, market buy price $24, so the dealer need to spend $24,000 for 1000oz of silver.
Case 1
If the spot price goes down to say $15, the selling price of silver still needs to be above $24 to break even. Otherwise the dealer suffer a loss. Is that the reason why dealer says TBA in their website when silver drop from $50 to $34 last month?
Case 2
If the spot price goes up to say $20, market buy price $26, the dealer can make a $2,000 profit when he sells.

My questions are, in Case 2,
when the dealer sold and make $2000 profit. He now has $26,000. But 1000oz still worth $26,000 at market price.
How can he hold both the goods and earn profit? [Unless he can buy 1000oz below the market price $26.]
Please advice >.<

Example:

Dealer buys 1KG silver at $1400.
Spot tanks
Dealer sells 1KG silver at $1200.
Dealer buys another 1KG silver at $1130
Spot holds
Dealer sells 1KG silver at $1200.
Dealer buys another 1KG silver at $1130.
Spot holds
Dealer sells 1KG silver at $1200.
Dealer buys another 1KG silver at $1130.
Spot holds
Dealer sells 1KG silver at $1200.
Dealer buys another 1KG silver at $1130.

You can see after 4 iterations he would've already made 4 x $70 dollars = $280 while still holding 1KG silver which has market value of $1200. So he still makes money.

It's more complicated of course but that's the gist.

 

[hyperinflation]

Dealers will buy at (or slightly under spot), then re-sell at a substantial markup. The spread (+ any hedging they do) cushions them against averse price movements...

 

[zurnaik]

They "make it up on volume"

 

[goldpelican]

Fishball has it right, and if you can point me to where I can buy new supplies of retail format bullion at or under spot (and I don't mean buybacks from the public), please do so Even 1000oz bars in Australia are sold over spot.

Generally there's an "operating inventory" of x ounces - say a dealer might hold 1000 ounces of silver - that's his capital. The business is interested in turning it over, as there is a spread between the buy and sell price - just get your head around the money being made being between the dealer selling at $x and then buying at $x-margin to replace stock - not the other way around which is the traditional retail model of buying low and selling high. The value of the inventory fluctuates with spot, but the dealer doesn't particularly care in the short term about the fiat value, but rather ensuring the number of ounces is maintained.

So the dealer will make money selling at a retail price for LESS than the item was bought for, as long as they replace stock immediately.

This is the "perfect" model of bullion dealing, hedging and other aspects come into it.

 

[mickjohn]

Im currently on BBs website and that of the Perth Mint.

How is it that BB can afford to sell Perth mint products at such a reduced price when compared to PM?

ex 1.
Perth mint lunar gold 1/10 coins.
Perth mint price $180.66ea (when purchasing in bulk 100+) individual price= $202.
BB price $175.22 ea.

ex 2.
Perth Mint 1 oz silver coins
Perth mint price 40.60 (when purchasing bulk of 500+) individual price = $44.10
BB price $41.69

Even with dealer discounts, buying in bulk and purchasing immediately after selling stock.... how can a business be profitable with negative or just slightly positive margins?

Discounting the fluctuations in silver (+-$2+ a day possible), if it were more stable it would cost BB $20300 to purchase 500 silver rounds which would sell individually at $20845. A $500 margin. In this margin, you have delivery costs (if applicable), order processing, logistics, security etc etc. and this is only if every customer bought the coins individually, discounts given for bulk sales.

edit to add:
Without considering the fluctuations in spot price, there is around a 2.6% markup. Consider retail operates in some areas at well over 100%

Seems easier to pour beer.

 

[fishball]

Im currently on BBs website and that of the Perth Mint.

How is it that BB can afford to sell Perth mint products at such a reduced price when compared to PM?

ex 1.
Perth mint lunar gold 1/10 coins.
Perth mint price $180.66ea (when purchasing in bulk 100+) individual price= $202.
BB price $175.22 ea.

ex 2.
Perth Mint 1 oz silver coins
Perth mint price 40.60 (when purchasing bulk of 500+) individual price = $44.10
BB price $41.69

Even with dealer discounts, buying in bulk and purchasing immediately after selling stock.... how can a business be profitable with negative or just slightly positive margins?

Discounting the fluctuations in silver (+-$2+ a day possible), if it were more stable it would cost BB $20300 to purchase 500 silver rounds which would sell individually at $20845. A $500 margin. In this margin, you have delivery costs (if applicable), order processing, logistics, security etc etc. and this is only if every customer bought the coins individually, discounts given for bulk sales.

That's the retail premium you pay when buying from Perth Mint.

Bullionbourse and other big distributors of Perth Mint probably have a contract or agreement stipulating that they get wholesale prices of PM coins.

They probably get like spot + 2% (or some number) for Perth Mint coins and it will definitely be cheaper than us buying bulk off the PM website.