| Thinking Of Investing In Gold? Do You Really Understand The Spread? |
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| Written by Bruce Holmes |
| Tuesday, 12 October 2010 19:37 |
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Have you heard the constant advertisements for gold? Companies like Goldline, Blanchard, Lear Capital, Rosland Capital and others, are all touting gold as a smart and safe investment. They say that gold is a hedge against inflation and that gold has never been worth zero. It sounds great, but how much must the price of gold increase for a small investor to beat the spread and come out ahead?
Have you heard the constant advertisements for gold? Companies like Goldline, Blanchard, Lear Capital, Rosland Capital and others, are all touting gold as a smart and safe investment. They say that gold is a hedge against inflation and that gold has never been worth zero. It sounds great, but how much must the price of gold increase for a small investor to beat the spread and come out ahead? Understanding some simple terms will help everyone understand gold as an investment. Everyone needs to understand the simple terms, "Ask", "Bid", and "Spread". Knowing these terms helps anyone calculate how much an investment in gold must increase in value to 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%. Remember that gold, like any investment, can increase in value or decrease in value. In the example above if the ask price of the coin decreases from $1,000 to $900 or 10% and the investor goes to liquidate the item he or she 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. Always check the spread on the items you plan to purchase. DISCLAIMER: This article is provided as information only and is not to be taken as financial advice. Bruce Holmes is a small business advisor and profitable marketer who searches for alternative strategies for wealth creation and preservation. He has built a free training module to help struggling network marketers. |