If gold drops value what happens?

[Ainsgb]

As a total newb to PMs and anything at all to do with finance and investments etc, im struggling with this concept...

If the spot value of gold suddenly drops to say £800oz, what will the mints/dealers etc do with their stock of gold? Will they just keep hold of it until spot rises again or will they charge very high premiums until theyve sold that stock through? In which case will spot price have any relevancy anyway? 

Surely they wouldnt just drop all their prices and sell at a loss.

Can anybody explain this in laymans terms please. I have tried to google it but nothing relevant comes back 

[Shep]

When the silver spot price got smashed in March most dealers seemed to just pretend it hadn’t happened and there wasn’t much (if any) movement on what they were charging for physical.

Gold is obviously a completely different ball game but as the saying goes - 

“Up like a rocket, down like a feather.”

[Ainsgb]

Yes this is what i thought. So surely the price for physical gold would only ever go up? It seems so detracted from spot values

[mr-dead]

premiums rise to offset set the drop in spot price.

 

[Ainsgb]

So physical value is determined by the consumer then not spot 

[Kman]

It is by spot

I know 2011-2013 gold was around £1000-1100

In 2013 is dropped about 20% down to £800

I don't know how long it took for physical prices to catch up, but when I started looking/buying in first half of 2014 it was totally linked to spot price and my first 1oz was £785

And when spot went down to lower £700s in 2014-15 you could buy it for that

There might be a lag between the two, dealer prices and spot if there's a big quick drop but you will get the price if it stays there

 

 

[Ainsgb]

Ok. So i guess the price of physical is driven by consumers, who are influenced by spot value. Some people will be willing to pay higher premiums then others, to a point. I guess prices start lowering soon as the mints can offer lower premiums. Some people will have paid over the odds in the meantime.

Thats fine, answers my query. Thanks for all your input.

[Kman]

Ok the best way to do it, I can't be bothered to look too much

Look at the archived pages of somewhere like Tax Free Gold (chards old website) this page is from June 2013 for instance

https://web.archive.org/web/20130621055606/http://www.taxfreegold.co.uk/wesellkrugers.php

Compare the premiums, it was 5.5% then after a steady drop in gold price compared to a more usual 3.25% when spot price is more steady

In 2011 when prices were high it was actually 6% but I guess that was down to high demand 

 

 

 

[Ainsgb]

Great! Thanks for your help! 

[Ainsgb]

Wish we had those prices again. Better late to the game then never i suppose 

[Martlet]

The mints and dealers will be hedged to protect against price movements in the underlying gold asset.  

[Kman]

Well all easy to say in hindsight

Because I started buying gold in 2014 as soon as sovereigns went over £200 that seemed expensive, was used to gold being £700s

Now of course if you could get sovereigns for that much you would fill your boots  

[Ainsgb]

Yes i imagine its difficult to make that decision when prices are at a high. 

[HelpingHands]

It'll depend on whether they can continue to source stock.

If a dealer had bought a coin for £1000 and spot drops to £800.   

They can still sell that coin for say £830 if who they buy from are now selling them for £800.

They just replace stock at the new price.........if available.

[HawkHybrid]

1 hour ago, Martlet said:

The mints and dealers will be hedged to protect against price movements in the underlying gold asset.  

 

dealers meaning metals dealers?

local coin stores(lcs) are not always hedged against price movements.

 

HH

[Tape]

Quote

If gold drops value what happens?

Don't worry, it won't happen

[Foster88]

I only got into gold in 2018.

If it drops dramatically then I suppose some of us will all loose out, those hoping for a ‘dip’, if it happens will be happier than a pig in s**t. 

When I first bought sovereigns they were £230, many on this forum bought sovereigns at £200, £100 or less. It’s all relative to how long you intend to keep your gold.

If you’re still buying now and intend to keep it for 30+ years then I’m sure you have a safe investment.

I bought sovereigns in January this year and paid around £270/£280 and now you can’t get them for less than £330. I do remember looking at sovereigns in 2016 and they were £185 each and half sovereigns around £95 each, now I’m seeing half sovereigns go for £180+, but as they say, what goes up most come down but we’re in unprecedented times. So there’s nothing to compare this to.

It might go up, it might go down but I feel short term, which I mean 2020/2021 it will go up.

Follow the gold price, you’ll learn a lot.

[Melon]

Providing stock is available from the mints, there's no reason for dealers to hang on to coins at silly high premiums in the event of a big spot price reduction. The dealer will simple sell at a realistic margin and replenish stock at the new lower rate. There's literally no point in losing sales, as you're still profiting on the restock price. 

The exceptions to this would be things like sudden short price dips or cases where it is not possible to replenish stock (i.e. the recent silver situation due to Covid-19). 

[Prophecy]

How does a dealer hedge themselves against a fall in spot?

[Au79]

3 hours ago, Prophecy said:

How does a dealer hedge themselves against a fall in spot?

By using a financial instrument such as an option as insurance against spot price movement.