The Case for Buying Gold and Silver on eBay: Understanding Spot Prices and the Paper Market
(a response to a guide located at: https://reviews.ebay.com/Buying-bullion-Silver-and-Gold-Stay-Away-if-your-smart_W0QQugidZ10000000001214500)
I read the ‘Buying bullion, Silver and Gold. Stay Away if your [sic] smart” guide here on eBay which generally discourages buyers from buying bullion on eBay because of the disparity between retail eBay prices and the COMEX market price of gold and silver (“spot price”). It’s a fairly popular guide and although there is something to debate about just how much margin retail investors are willing to accept to have physical delivery of gold and silver, I think it may miss some of the realities of why prices are the way they are on eBay.
Let me begin by assuring you I’m not a bullion dealer. You can look at my history here on eBay and see that I’m primarily a buyer, not a seller, of bullion. To be honest, I wish I was a dealer. I love following this market. I love trying to explain to people the fears of inflation and why I think silver will return as a global form of currency in the future. Rest assured, I’m not trying to sell you on anything I’m listing on eBay, because I don’t have anything listed on eBay. I will share my thoughts rebutting the arguments made by the ‘stay away’ guide here on eBay, which will hopefully give you a more balanced outlook of the market as a whole.
For starters, the aforementioned guide does make a distinction about the value of pure bullion (with no face value) against those of government-issued bullion coins like the American Eagle, Canadian Maple, Vienna Philharmonic, etc. However, the distinction is poorly defined, and in reading the ‘stay away’ guide, it’s difficult to remember the author is focusing purely on bars and rounds and not offering an opinion on other forms of bullion. In fact, the author notes that coins ‘come as a much better value’ on eBay. For the sake of argument we’re going to limit our comments to the big-name manufacturers like Pan American, A-Mark, Sunshine Minting, Johnson Mathey, etc. We’re going to do this because we can trust the purity of the bars/rounds right from the start.
The author correctly points out that the premium for bars/rounds to the COMEX spot price is quite high, and it’s hard to disagree. What we should focus on, however, is why that premium exists and if there’s a better or cheaper way to acquire the metals in physical form. I have plenty of silver bullion bars I’ve paid $17-20 for on eBay within the last few months. If I’m aware of the spot price ($12.76 as I type this), why on earth would I pay $17-20? The answer is usually because it’s not widely available anywhere else.
The spot price represents the raw metal as it’s pulled out of the ground. The refiners have a cost to make them into pretty bars and they pass that cost to us in the form of premiums. Refiners typically sell to dealers (like Apmex) and dealers typically sell to smaller retailers (the people listing the bars on eBay) have their own premiums on top of the refiner’s premiums. Let’s establish this as a basis for ‘some’ of the margin we see. So why don’t we all just buy directly from the refiners or at least the dealer? That’s not always so easy.
Take a look at Apmex’s web site, one of the largest dealers that appears to have availability of metals and a very easy shopping cart system. Their cheapest gold product is a 1 gram bar (about 1/30th of an ounce) for $39 in quantities under 25. Based on the current spot price of gold, you’re only getting about $29 worth, representing an unbelievable 34% premium. I just watched a current auction of the same bar go for $36 on eBay, very much in line with what the major dealers are getting. Moving up to the only available 5 gram bar (about 1/6th of an ounce) on Apmex, you’re looking at $156, or only a 7% premium. The cheapest 10 gram bar (about 1/3rd of an ounce) is selling for $308. That’s only a 3.3% premium over the equivalent spot price. See a trend here? Unfortunately, all of their 1oz bars are out of stock. Checking eBay’s completed listings for the last 1oz gold bar? It went for $919 with free shipping or just a 2.7% premium. Even a bunch of listings from three or four days ago went in the $950 area, still only a 6% premium. On the 1 gram side – two recent auctions ended for $47 representing a 62% premium and the kind of margin the original author of the ‘stay away’ guide warned us about. That brings us to our very first lesson:
Bullion will ALWAYS have larger margins for small and fractional sizes, regardless of whether you’re buying on eBay, through a dealer, or a coin shop.
Simply put, you’re paying for the convenience. The market doesn’t measure gold or silver in tiny and fractional lots. Investment houses purchase hundreds, sometimes thousands of ounces at one time. Moving our focus to silver, completed listings show a 1000oz lot for $14,275, or an 11% premium. 100oz auctions show a 21% premium. 1oz auctions over the last few days have varied from 20-25% premiums. Apmex’s cheapest 1oz silver bar? It’s $15.17, just slightly cheaper than the auctioning on eBay. And looking at both gold and silver, we come to our second lesson:
Silver has established a higher accepted premium compared to gold.
This begins with the issue of affordability. You can have a full ounce of silver, something to carry in your pocket and maybe someday use to pay for groceries, for a price everyone can afford. Everyone has $13 to spare. You don’t have to mess with fractional values; you can easily figure out its worth at any given time. It has historically been a unit of currency and accepted exchange throughout human history. Gold has these traits as well, but it’s too expensive for the average joe to get more than a few ounces of. This is one of the reasons why we pay a little more for silver. On top of that:
There are abundant and valid arguments as to the legitimacy of the COMEX trading system, meaning the ‘spot price’ of silver (and to a lesser extent gold) is wrongfully manipulated to begin with.
Much like the US Treasury can print currency that isn’t ‘backed’ in anything other than the faith and credit of the government, commodities traders can sell paper lots of gold and silver that they don’t physically have. This is called shorting, and it’s their way of betting against the prospects of gold or silver. Shorting is perfectly acceptable and a legal practice, but the regulatory controls have long since failed. Theodore Butler, a well known silver analyst, has been in a decade-long battle with the NYMEX and CFTC (who administer the COMEX) to prove this manipulation. In a February letter to the NYMEX, he stated that one or two US banks alone has a net short position equal to 25% of the world production of silver. Think about it – that’s a stunning number. One or two banks has ‘sold short’ ¼ of the entire world production of silver. In their response to Mr. Butler, the NYMEX did not specifically deny these figures, only to suggest that they are a legitimate ‘hedge’ for these banks. So a couple traders, or banks, or whomever, can sell a bunch of paper that drives the price of silver down that may really have no representation as to the actual market for physical silver. The fact of the matter is that the spot price is determined by traders buying and selling ‘paper’ futures of the metal, not the physical metal itself. If I bought gold future through my broker right now, I wouldn’t get a box in the mail with a bar in it. That leads us to another lesson:
Bullion shortages are becoming more common (especially in small and fractional weights), investment demand is rising, and owning bullion in PHYSICAL form is the only way you can GUARANTEE your interest in it.
Several times in the last year, the US Mint has had to suspend production of gold and silver eagles because, they claim, they can’t acquire the gold and silver ‘blanks’ from their supplier. Whether or not this is accurate is up to debate, but clearly even the government has a problem with receiving bullion so they can make it into government-backed gold and silver. Google ‘US Mint Suspends’ and you’ll find plenty of reading. Many dealers have delays of 4-8 weeks for delivery of not only US, but other government backed coins. Why? The respective mints, in my opinion, just can’t get enough physical silver to make their coins. If they can’t get the raw bullion, why should we be surprised that the sellers on eBay who have bars and rounds in hand would be selling it at a premium? This relates, again, to the real validity of the COMEX spot price and how it is completely out of whack with the rest of the world market for bullion. With all that digested, we learn:
eBay is not a widespread ‘ripoff’ as it may appear from the author’s ‘stay aware’ article, it’s more of a real world reflection of the reality of the bullion market.
You can find deals. No doubt about it, there are sellers who will milk the inherent premiums as much as they can, and I agree it’s a good move to stay away from them. That said, we’ve looked at a lots of examples of recent completed sales versus the dealer prices of one of the largest bullion dealers I know of, and we found that they’re generally in-step with each other. It’s difficult to buy small quantities of bullion at spot price, regardless of where you look. Sure, some local vendors may have a few rounds here and there, but generally speaking, supply is extremely tight. The sellers on eBay, those who are legitimately making a business of reselling bars and rounds, have the metals on hand. They likely paid a fortune for massive lots of them to get the largest discounts, which as we’ve seen, sometimes is a fraction of a percent against the price of just 1 bar. I pay the general ‘eBay market price’ because I’m going to physically have the metal. I don’t have to worry about the shenanigans at the COMEX. I don’t have to wait for 4-8 weeks of delivery and delays. I don’t have to buy 100 bars to get the best prices, I can simply shop around at my leisure. On top of that, you can even save 8-35% on your purchases with the Microsoft Live Cashback program, something you’re more assuredly not going to get anywhere else. So in conclusion:
eBay is a great market for silver and gold because it’s compromised of individual buyers and sellers, not institutions, and not professional traders.
The law of supply and demand is simple. If there were more supply of bullion available on eBay, prices would edge lower over time. If there was less supply for the everyday joe to get a couple ounces of gold or silver, prices will rise over time until it meets demand. Bullion, or anything else we purchase, is only worth what others are willing to pay for it. Instead of citing a paper market to price a physical asset, eBay is a great way to demonstrate why the physical market should be dictating the paper market. This is proven time and time again with other products. Back when Saddam Hussein was ousted from Iraq, some of the old Iraqi currency ended up on eBay for $20 or $30 bucks a note because it had his likeness on it. After a month or two, the prices plummeted as more and more sellers tried to cash in. Nowadays, you can find them for a couple bucks for a set of them. This was a clear demonstration of what happens when supply overwhelms demand. On eBay, prices for bullion are where they are because supply is meeting demand. On the COMEX spot price, supply doesn’t have to meet demand because the physical metal is rarely actually transferred. To have gold or silver in your possession is worth the premium. In many respects, let’s be thankful the premiums are not higher.