What is Liquidity and Why is it Important for Investing in Gold and Silver Assets?

The GoldSilver Team 

In a free market economy, virtually any tangible good can be sold to someone, somewhere. When you’re a seller, your primary concern will likely be receiving what you consider to be “fair value.” Is that something you can be reasonably sure of getting, or might you wind up disappointed?

Liquidity refers to how easily you will be able to sell an asset at a widely recognized fair price on the open market

Gold and silver bullion are highly liquid assets. There is a universally recognized pricing mechanism call spot price that all market participants ⁠— buyers and sellers alike ⁠— can check at any time to determine either metal’s current fair value

A highly illiquid market is one in which there are few and inconsistent buyers and sellers. Pricing in these markets is subjective and there can be great disagreement about an asset’s current value. Examples include fine art, baseball cards, or numismatic coins.

Liquidity: Knowing That You Can Sell When You Need (or Want) to Sell

Liquidity is an often-overlooked consideration for investors, especially when it comes to gold and silver.

The nice thing about the market for bullion is that it is well-defined. It trades more like stocks — which are priced on a daily, ongoing basis — than they do like collectibles such as fine art, classic cars or baseball cards.

Collectibles, or ‘numismatics’ as they are often called, are worth whatever someone will pay for them at the moment for their perceived rarity and demand, which is often far far different than their underlying metals value. Those prices can fluctuate wildly, and demand can sometimes completely dry up. Even when there is demand, the number of buyers is a tiny fraction of the global bullion market. Which means that they tend to have poor liquidity. One man’s treasure can be another’s trash.

Not so with gold and silver bullion. Their value is linked closely to the global market price of unrefined metals, known as the spot price, which is updated around the clock and is accessible to buyers and sellers at all times.

Spot, expressed as the price per troy ounce of precious metal, serves to put a floor under trades. Why? Because a dealer knows that in the worst case, if they buy a coin from you and cannot find a buyer in short order, they can always sell that coin as scrap gold and get spot minus the cost to melt it.

Thus, when you want to sell a coin or bar, you should be able to receive very close to the cash equivalent of spot, less whatever transaction fee the dealer charges.

Of course, not every coin or bar sells for exactly spot. Some fetch less. Some more. Because not all coins are created equal.

Recognition matters. Legal-tender, government-minted coins like the American Eagle and Canadian Maple Leaf are widely recognized. You can walk into a coin shop most anywhere in the world and sell them, or arrange a private party sale, with relative ease. However, less popular coins from mints like those of South Africa or China may be harder to move.

Sovereign minted coins also tend to carry large “seigniorage” charges -- the fees the mint charges the wholesale market above its precious metal value. Since the cost of a new Silver Eagle, for example, is about $2 per coin at the mint, the buy and sell prices for that same coin -- the difference between which is known as the “spread” -- tend to surround spot + seigniorage or spot + $2. Some investors also note that seigniorage charges tend only to rise over time and thus prefer sovereign coins as there is a possible chance to gain a little more on a long term investment if both metals and seigniorage prices rise together. It’s one of the primary reasons other than recognition that sovereign-minted bullion remain the most popular choices in the world (along with favorable tax treatments in some jurisdictions and a general sense of comfort that more effort is put into to combating counterfeiting).

Then there are rounds, i.e. coins issued by private, non-government mints, and privately minted bars. These items typically contain the same precious metal weight as their government-stamped counterparts, and they can be a cost-effective way to accumulate gold and silver, since they are usually cheaper. However, there are differences in ounce-quality. Rounds and private bars do not have the same global recognition. There will usually not be as comprehensive of a buyer’s market.

However, because of the relatively low cost of these rounds and bars, and the aforementioned melt value floor that spot helps set, they can often have a smaller spread and thus be more profitable than sovereign-minted bullion. This is why it is important that you research not just the initial cost of a bullion investment, but the ‘bid’ offered were you to sell it back as well. The less that total spread, the better for you as an investor.

One exception to the tight spreads, from both sovereign and private mints, tends to be commemoratives, i.e. gold or silver coins issued to commemorate some specific event, like an Olympic Games. These should generally be avoided. They are often minted in “limited-edition” runs, and touted in expensive ad campaigns, so that vendors can charge a higher premium because of their perceived “scarcity.” This makes them more of a collectible. Buyers who want them are creating collections of one kind or another, while the generic buyers who only want an ounce of metal are seldom interested in paying the premium such coins carry. Harder to sell, in other words.

Common or generic rounds — i.e those minted continually in a standard format — are much easier to sell than commemoratives. Again, if you go into a coin shop intending to sell a round, the owner may or may not want it or may pay less than melt value, whereas he would always welcome an Eagle or Leaf.

Thus government-minted coins are the most liquid, most widely traded bullion.  It’s one of a few reasons why they command a bit of a premium.

And in a pinch, where you need cash in a hurry, a buyer may hesitate with a less common round and offer you much less than you believe it to be worth. Your market choices may be more limited.

Still, thanks to the global liquidity of precious metals in general, there is always a market for virtually any pure precious metals coin, round, or bar. And what really matters most is that you do not overpay to begin with, relative to what an asset is likely to sell for down the road.

Ahem. “Mind the spread.”




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