Surely their entire inventory wasn't purchased at 14.84 an ounce, so how can they sell at lower prices than previous and still make money?
I'd say their ridiculous premiums on rounds/bars. The prices about 5 days ago for 1 oz bars were soaring over $20 each now they are $18.50-$19.00 each. They are still making profit if silver drops a couple dollars just not as much as they would if silver didn't drop since they usually buy for melt or under melt.
Because they buy silver a percentage under spot and sell it for a percentage over. It's a slight margin, but hopefully they profit on volume. Plus, some dealers I know will pay WAY back of spot, depending on what the customer knows about their coins/bullion...so they're covered in case of a short term dip in the market.
When some of these dealers have millions of ounces in inventory and sell millions of ounces per year, how are you to know if you are buying generic silver that wasn't purchased at $5? I'm sure these dealers have learned how to juggle their inventory in such a way to achieve the best income tax results. Chris
On any given day they will own nothing. Or any given week, depends on the dealer and market volatility. Purchases will be hedged, sale will be hedged, and they make the profit on the daily turnover. How far they divert from this model depends on their view of the market and their risk tolerance. If you start the day with no position, trade $200000 with a 3% margin and go liquid at the day's end, that's about $6000 you have made during the day. That's the almost zero risk position. Dress it up with more risk, you have more reward if you get it right, give worse deals and you don't get the volume to make the margin good enough to cover overheads. Depending on the competition locally, of course. But it would be wrong to think of bullion dealers sitting on great heaps of PMs that they have bought and paid for. The local pawn shop or coin dealer may work this way, but they will hedge the rish with much wider margins.
Hedge. Use line of credit at .5%/month. Turn inventory once/twice per month at 5-10% premium. If they can make a 5% gross profit on the same capital (or better yet leveraged capital) 18 times in a year, that's a hell of a business. The bars I just bought tonight aren't even in stock yet. They'll get them in one door and out the next in probably the same day. I have no first hand experience, but I can see some creative use of a credit line, hedging, and tight inventory management leaving a lot of profit margin on the table for nothing invested. I used to buy from a shop in Des Moines, IA and he told me that he hedges everything he buys. Hedging isn't free, but if you can move your inventory fast enough, you'd make out just fine. Judging by how much stuff is regularly out of stock, I'd say they're not carrying more than a few days normal supply.
Btw, which shop? Christopher's, Stamps and Stuff, or someone else? My favorite dealer of all time was Ben Marlenee, but when the building his shop was in burned down in the mid 90's, (downtown Des Moines), he stopped having a shop.
There used to be a good dealer there, then an insane man, (no, literally), but last I heard he wasn't open to the public. I am glad a good dealer moved in over there.
Most don't hedge with a line of credit, as there is little leverage. Put options will buffer downward movements as they can be sold to balance inventory losses. Straddle options where both a put and a call are placed at the same time, If the commodity stays the same price, you tend to lose. Otherwise you win whether the price goes up or down. Move the straddle as the price moves and hope for a big crash or a big upward movement. You win. Sell out and buy the silver yourself if you don't want to maintain the move.
Most dealers don't just make money off of bullion, bullion is normally a small piece of their entire business. All the coin dealers I know sell their bullion for a very small profit, maybe a dollar or two over the price they paid. It's not that difficult to keep track of after years and years of doing it. Like I said, bullion is just a small part of the business.
Also, keep in mind that at just about any price point, people are both buying and selling. Often times they're doing so in the opposite way you'd think they would be. i.e. Buying when prices are high and selling when prices are low. It doesn't happen very often that a person backs up the truck to the bullion store and buys at the very bottom of a dip, and most dealers I've dealt with will adjust their margins in their favor when the spot price falls quickly. However, they don't usually adjust them in the customer's favor when the spot price rises quickly. So my question for Tim is, how would a bullion dealer not make money? As long as they have an ounce of business sense, the only way I can think of is not getting enough business to cover their overhead.
You're a dealer, you purchase 100oz of Silver Eagles today for $1 over spot. You buy 1 at the money SLV put (expiring next Friday) for $30 including commission. So your cost is $1.30 per ounce. If silver doesn't move, and you sell them before options expiration for $3 over spot, then you realize $1.70 per ounce profit. If silver went up, you make more money. If silver dropped $2/oz then you break even on the Eagles (selling $3 over spot) and make $1.70 /oz on the put. You're making over 10% with silver at $16/oz.
dealers dont buy under spot... unless its privately... spot value is just a guided value for the metals... most dealers pay over spot... then charge to acquire... this is how they make money. As much as they are selling at lower maybe buying at higher... there is the other side where guys who have lost a lot sell it very low and the dealers come up big time!
Dealers love selling big volumes... then getting it back when its lost a lot... they are buying it back at a discount just like anyone else when the metals are low.
