What Does “Secondary Market” Mean in the Bullion Industry?
“Secondary market bullion” might sound more complex than it is to many Australians who are new to the precious metals market. You might find the terms “secondary market,” “pre-owned,” or “previously owned” used to refer to gold or silver bullion and think this means it is not as real, not as valuable, or not as good as newly minted bullion.
The difference is normally not between the authenticity of the bullion or whether the metal is investment grade, but rather the source of the bullion. By learning about the secondary bullion market, investors can be more confident when they make comparisons, determine any premiums, and make more informed purchase or sale decisions.
What Is the Secondary Market in Bullion?
The bullion which has already been bought and sold once before in the past is called secondary market bullion. Primary markets, on the other hand, tend to be bullion transactions in which the bullion gets into the market through an official distribution channel from the mint or first producer.
For example, the gold bar may have been bought from the gold refinery or mint by the dealer. In case the investor then goes ahead to sell this gold bar to another bullion investor, who in turn sells it to another investor, the latter sale will be the secondary market sale. There has been no modification of the physical gold at all.
Primary vs Secondary Market Bullion
The difference becomes clearer when the two markets are compared.
Both markets can provide access to investment-grade precious metals. For example, The Perth Mint currently sells gold, silver and platinum bullion in the form of coins, minted bars and cast bars, with prices linked to existing precious-metal market conditions.
Why Does Secondary Market Bullion Exist?
Bullion is meant to be traded. There are many reasons why investors dispose of their assets, which could range from rebalancing the portfolio, profit-taking, getting funds, change of strategy, or moving from one asset to another.
This guarantees that bullion will naturally move hands from the owner. The dealer can step in and acquire bars or coins that were acquired by the investor, appraise them, and offer to another dealer.
The existing bullion companies will also accept bars that are already in existence from some of the best refiners, with their own set standards in purchasing them. For instance, the Perth Mint says that it will purchase the gold and silver bars and ingots from most of the LBMA accredited refiners, but at the same time it needs to make a decision about the non-accredited ones. This is a perfect illustration that secondary is not necessarily second-class.
Is Secondary Market Bullion Genuine?
The word 'secondary' is not used as a synonym for 'counterfeit,' 'damaged,' or 'low quality. The key aspects to consider are the bullion's purity, authentication, the form of the bullion, the recognisability of the bullion where relevant, and its provenance.
While the Australian Taxation Office (ATO) provides definitions for precious metals under specific requirements for gold, silver and platinum, the investment form is 99% when held in investment form. The ATO also knows the difference between investment-form bullion and numismatic or collectible products.
Bullion coins are a case in which it should be taken into account how much the product is worth compared with the amount of metal. So, for the buyers, it should not just be "Is this secondary market?" but rather:
What exactly is the product I am purchasing, and what can be done to verify its authenticity, purity, and investment qualities?
Why Can Secondary Bullion Cost Less?
An advantage of secondary-market bullion is that sometimes it comes with a lower premium than similar newly created bullion. The cost of bullion typically consists of two parts: the price of the precious metal itself, and the premium for the specific bullion.
Premiums may take into account:
- Manufacturing costs
- Refining and minting
- Packaging
- Distribution
- Dealer margins
- Product availability
- Market demand
- Brand recognition
The base price of the metal also fluctuates. Bullion dealers will thus take note of the conditions of the prevailing spot market when deciding on a price for purchase or sale. Spot prices are used to give a guideline to transactions involving precious metals, and other factors are also taken into account when determining retail dealer prices, such as transaction size and market conditions.
A secondary product may have been worked through the first manufacturing and retailing process, thus allowing the opportunity for some products to be bought at another premium. But the lower premium does not necessarily equate to better value. When buying bullion, you should take all the above factors into account, as well as the dealer's reputation and the potential resale market.
Secondary Market Bullion and Resale
When buying physical valuable metal products, one of the key factors to consider is liquidity. Well-known bullion products are usually more readily valued and traded by reputable dealers. A reputable refiner and recognised mint, along with having the weight and purity clearly noted and a standard bullion format, can all make future transactions easier.
For example, The Perth Mint purchases well-known gold and silver bars, bullion coins, and other precious-metals products at a price based on the conditions and market for the product being purchased. That's why investors need to consider the exit strategy before buying.
Ask:
- Who will want to purchase this product in the future?
- What is the extent of the mint's or refiner's recognition?
- What is the cost of the premium?
- How much are similar products being sold for now?
- Does the product have a high metal value or is it collectible?
Making Sense of the Secondary Bullion Market
The secondary bullion market is an alternative route to trading in precious metals, and it can offer investors the potential to obtain lower premiums than newly minted metals. But buyers should not look at the price, per se, but at authenticity, purity, product recognition, dealer reputation, liquidity, and resale value.
For investors in Australia, Perth Bullion Exchange offers access to products based on precious metals and advice to help investors make informed decisions when buying precious metal products, whether new or second-hand.
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