One question people ask themselves is how gold dealers make money. It is a very simple question, but one that has a rather complex answer. No two bullion dealers are alike, thus exploring different strategies is a must.
The Obvious Answer: Premium Fees
As far as how gold dealers make money, the most common answer is “the premium”. More specifically, it is not uncommon for dealers to charge a little fee on top of the spot price on the market. How high that fee goes, is up to individual dealers and brokers. It can range anywhere from a few US Dollars to $50 or more. There are no limits as to how wild these premiums can be.
As has become apparent in various countries, the “premium” is not always a viable way to make money. One also has to wonder how gold dealers make money if there isn’t enough demand for bullion. They are often forced to sell below the market price, although it doesn’t necessarily incur a loss. Any item – bars, coins, etc- bought by a dealer is never done at spot prices either.
Exploring the Hedging Angle
For gold dealers who are not intent on charging [too much of] a premium, hedging gold can be a worthwhile option. Hedging has trading costs and offsetting them will require significant volumes. Offsetting long positions with short positions is a risky game. This will never result in making any real profit, but it will provide a safety net if the gold price were to collapse.
If one were to ask how gold dealers make money with hedging, the simple answer is: they don’t. It is a valuable practice for those who expected a sudden downturn, but for everyone else, it will simply not be worthwhile. Being able to avoid a wipe out is often more important than making money..
Profiting From Price Movements
The most common option is to simply make money as the gold price moves up. This will require having an inventory purchased at lower prices to ensure most transactions yield a profit. If the market sours, however, it is a very troublesome game to play. One cannot simply sell less gold because the price isn’t where a dealer wants it to be.
That being said, it is possible to offset most losses by timing purchases correctly. A certain amount of time elapses between the sale of bullion and replenishing the stock. It is not the most common solution for brokers learning how a gold dealer makes money, but it can be worthwhile if done correctly. Buying in bulk at lower prices is often advised.
Selling “Extra” Items
Contrary to what some may think, a bullion dealer is not just limited to selling items in gold. They can sell a lot of other items, gadgets, and tools. Binders for coins, protective cases, price guides, books, and other materials can all bring in a tidy profit over time. Ensuring the pricing on those yields a decent profit margin can make the difference when bullion prices go down all of a sudden.