subject: Thinking Of Buying Gold? Do You Understand The Spread? [print this page] Gold companies like Goldline, Blanchard, Lear Capital, Rosland Capital and others, are advertising on television and radio continuously. They all tout gold as a smart investment. They say gold is a hedge against inflation. They imply that gold is safe because gold has never been worth zero. It all sounds so good. How much must the price of gold move up for a small investor to come out ahead?
To understand gold as an investment you must understand some basic terms. Everyone needs a clear understanding of the terms "Ask", "Bid" and "Spread". Understanding these terms helps you calculate how much your investment in gold must appreciate so that the small investor can make a profit.
The first term is the "Ask". This is the asking price or purhase price of the gold coin or bar. This is the retail price. When an investor contacts a gold company he or she will be paying the ask price for the gold coin or bar. Like any other product the price goes up or down depending on market forces.
The second key term is the "Bid". The bid price is the buyback price of a gold coin or bar. This is the price a gold company will offer to pay an investor who wants to sell his or her gold coin or bar. The bid price is always less then the current ask price. Most companies also charge the investor a liquidation fee or buyback fee. This fee is generally 1% of the bid price.
The third term is the "Spread". This is the difference between the "Ask" and "Bid". This can range anywhere from 5% to 35% depending on the type of coin or bar you are trying to liquidate. If you buy a gold coin or bar that has an ask price of $1,000 and a bid price of $700 there is a $300 or 30% spread.
The spread is set by each company based on what it believes the market will accept. The ask and bid prices generally move in the same direction. When the ask price goes up so does the bid price and when the ask drops so does the bid. There is always a spread between the ask and the bid. If there is a 30% spread on a coin when you purchase it, there will usually be a 30% spread when you sell.
What does the 30% spread mean for an investor? By way of example lets assume that an investor buys a coin or bar with an ask price of $1,000 and a bid price of $700. This means there is a 30% spread on that purchase. Now assume that the coin or bar goes up in value by 50%, that means the ask price will be $1,500. Now lets say you want to sell it back to a company like Goldline. They will offer to pay you the bid price of $1,050 ($1,500 minus the 30% spread of $450.) Goldline will also charge 1% of the bid price as a liquidation fee or in this case $10.50 (1,050 x .01= 10.50). This means the investor will receive $1039.50. This leaves a profit for the investor of $39.50 or a 3.95% return on a $1,000 dollar investment that in our example appreciated 50%.
It is important to remember that gold is an investment. It can go up and it can go down. If the ask price of your coin in the above example drops from $1,000 to $900 or 10%, and you go to liquidate the item you will receive a bid price of $630 ($900 minus the 30% spread of $270.) This means that an investor will have lost about 37% of his or her $1,000 investment on a 10% drop in value. Make sure you know what the spread is on the items you are buying.
