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Gold can be an appealing investment due to its ability to be a long-term inflation hedge and hold its value over time. However, if you’re going to buy this precious metal, it’s important to do some research.
Some companies mark up gold coins, bars and jewelry by 20% or more. Here’s how you can tell if you are overpaying.
What is a gold markup?
A gold markup is any amount that a dealer charges above the spot price, which is the real-time market price of the gold. For instance, if an ounce of gold has a $4,700 spot price and a dealer charges $4,800 for an ounce of gold, that’s a $100 markup.
It’s normal for sellers to tack on premiums. They incur expenses that go beyond the spot price, including minting, distribution, shipping, insurance, storage and credit card processing fees. On top of those costs, the seller needs to secure a sufficient profit that can keep the business running.
The Commodities Futures Trading Commission (CFTC) says you should ask what the spot price is before buying gold so you can assess how much more than the spot price you’re paying. A markup doesn’t automatically mean you are getting scammed, especially when it comes to jewelry. Jewelry has higher markups to account for its design, brand and additional labor. However, the markup should be disclosed, and it is a good idea to compare it to what other dealers are offering.
How to calculate whether you’re overpaying by 20% or more
Jewelry markups have more variability. But the typical markup for common bullion products, such as coins and bars, is low single digits to around 10%, though it can be higher for smaller products and specialty coins. That’s why a 20% markup can be a major red flag, and there’s a simple calculator you can use to determine if the premium is unusually high:
(Retail price – gold spot price) / spot price = markup percentage
Using the previous example of a $4,700 spot price and a $4,800 retail price, you can arrive at the markup percentage.
(4,800 – 4,700) / 4,700 = markup percentage
This comes out to 0.021. Move the decimal point two places to the right, and you will arrive at a 2.1% markup percentage.
Confirm the gold’s weight and purity. For jewelry, you also have to consider karats: 24 karat gold is pure gold, while 18 karat gold is 75% gold, and the scaling goes down with fewer karats. You should also consider taxes, shipping and payment fees when assessing if you are getting a good deal on the gold you are considering. If you want to obtain gold but feel overwhelmed about the process, you can take a quick dive into Money’s gold buying guide.
Red flags to watch for
Red flags can come up when you speak with the seller. Any fear-based language like “limited time” offers and lack of clarity on essential details like the weight, purity, premium over spot and buyback price are red flags. It’s also not a good sign if the seller talks about the spot price without bringing up the spread and how much extra you will have to pay.
One way to navigate risks is to get at least three quotes and compare premiums on similar products.
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