You may have heard the advertisements on the radio or have seen them on television. Gold companies like, Goldline, Blanchard, Lear Capital, Rosland Capital and others all touting gold as a smart investment. It all sounds so good. It is true gold has never been worth zero and it is supposed to be a hedge against inflation.  How much must the price of gold go up for a small investor to beat the spread and 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 selling 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”. This is the buyback price of a gold coin or bar. When an investor wants to sell his gold investment back to a company like Goldline he or she will be offered the bid price.  The bid price is always less then the ask price. In addition Goldline, like most companies, will charge you a liquidation fee. In Goldline’s case that is 1% of the bid.

The third key 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 and ask price of $1,000 and a bid price of $700 there is a $300 or 30% spread.

Each company sets the spread they believe the market will tolerate. When the ask price on a particular coin moves up so does the bid. When the ask price drops so does the bid price. There will always be a spread. If there is a 30% spread on a coin or bar when you buy it, the spread will generally be about the same 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 a 1% liquidation fee of $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 is 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 or10%, 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.

Bruce R. Holmes

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