Trading gold for silver: the business and fine print of barter

The gap between bars and coins: trading gold for silver

A one-kilo gold bar buys a farm, but not a steak. That idea underpins a business of exchanging precious metals: gold for silver, silver for gold, bars for coins and coins for bars, taking advantage of the price gap between formats. The premise is that large bars are only good for large transactions, while small pieces and silver work as pocket change for day-to-day use. It comes with an invoice, haggling is allowed, and the exchange is closed by courier or in person. And like everything that smacks of a safe haven, it drags along two eternal debates: how much metal is lost during melting and whether the swap is worthwhile or just an elegant way to overpay.

From €631 to €207: the price table that sustains the swap

The numbers are specific. A 20-gram gold bar (Argor-Heraeus) is bought at €631 and sold at €730. The 10-gram one, at €316 and €381. The 5-gram one, at €158 and €207. The exchange is built on that spread: whoever hands over 20 grams gets €631; whoever receives 15 grams pays €381 plus €207, that is, €588. The difference is around €43, and transport must be added.

Hence the awkward question that opens the conversation: what about my profit? The answer depends on which side of the counter you are on and the size of the pieces. It is admitted bluntly that bars of 50 grams or less do not pay off the same as silver or gold in larger formats, and that small exchanges were almost the only bad trade in the series. With silver, the calculation gets worse by weight: moving kilos makes shipping more expensive and squeezes the margin. A user offers one-gram mini-bars (PAMP Suisse) at a 22% premium over the metal price.

Melt loss: from 8-12% to “practically nothing”

This is where the fight begins. One camp maintains that melting pure silver to change format destroys between 8% and 12% of the metal: the crucible, adhesion to the walls, filtering and refining eat up the margin. The figure is presented as inevitable and tied to the process, not to the purity of the piece.

The opposing camp denies it with equal certainty. The loss from fine silver shot is negligible, and the mistake is to confuse shot with scrap: the latter contains solder and foreign alloys, the former barely loses anything. Melting silver-plated coins sends the loss soaring; melting sterling silver leaves it residual. In the words of those who do admit that loss, the loss occurs “when changing the format, not just when changing the purity.”

The standoff even produced cross-predictions. Whoever argues that the loss is inevitable is calling for a test with a wager; whoever argues the opposite offers to provide the means to carry it out and admits he is wrong if the loss exceeds half of his own range. So far no one has put the metal in the crucible in front of witnesses. The detail of the bet, with the pieces each side risks, remains unresolved.

Not all coins are worth the same

A warning to the unwary that most brochures omit: a silver eagle is not worth the same as a generic piece of the same weight. Swapping coin for coin, counting units, is the fast track to overpaying. Serious exchanges are calculated on fine silver, not on the number of pieces. Purity, year of minting and collector demand move the final price far more than gross weight suggests.

VAT, invoices and the lure of barter

Tax is the other driver. With an invoice and VAT involved, swapping becomes more attractive than conventional buying and selling, and the VAT increase itself is acknowledged as a tailwind. The forecast being floated is that when VAT rises in Germany in 2014, metal exchange will be the most profitable route. Before that, the warning is the usual one: silver prices in Spain rise with the tax on all coins, so it pays to get ahead.

Smelters, paperwork and the problem of swapping

Behind the counter lies logistics. Converting coins into bars requires accredited smelters, and accredited ones demand paperwork and traceability; they do not stamp their seal on a block of metal melted at home. Recognized refineries refine and issue a certificate, but the hobbyist who melts in the garage is left with an unbacked bar and a suspicious buyer. That is why the business relies on exchanging already-certified pieces, not on home smelting.

The underlying argument is one of an extreme scenario: if the system breaks down, a kilo of gold cannot be exchanged for food, but small pieces and silver can. The conclusion remains hanging in the same place where it began. No one has proven how much is lost during melting, and the spread between buy and sell still decides who wins in each barter.