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The True Cost of a Gram of Gold...
by Michael Valadez
What is the true cost of a gram of gold?
As a seller of gold paydirt, I am always amazed at the lack of information and poor logic exercised by amateur gold mining “experts” as they excoriate a paydirt seller who guarantees a gram of gold for $49 when the spot price is also $49.
“False advertising!” they cry! “He can’t possibly be selling gold for the same price as the spot price!”
On the surface this statement may appear to be true, and anyone selling their gold at cost will not be in business for long.
However, where their logic falls apart is that they are assuming that the cost to mine an ounce of gold is the same as spot price…it is not!
We all talk about the spot price of gold, but many don’t understand what the spot price is. Quite simply, it is the going price to buy and sell an ounce of gold on the open market. http://www.kitco.com/charts/livegold.html
For us little guys, we deal in grams rather than ounces and, while the total cost of a gram of gold is far less expensive than an ounce. (31.1 grams per Troy ounce), a gram of gold is far more expensive than buying an ounce of gold (31.1 grams) in bullion form, at least in terms of the "premium" you will pay on top of the melt value of the gold. One gram gold bars often sell for a 20% to 30% premium whereas 1 Kilo bars of gold can be found for less than 2% over the spot value
Gold mining on a large scale is extremely expensive, full of risk, and subject to the increase and decrease in the spot price of Gold on the world markets. Many a large gold mining company has gone out of business due to falling gold prices.
In fact, if you read financial reports of the larger gold mines that are required to publish their operating costs, you will find a term called “all-in sustaining costs (AISC).
“All-in sustaining costs take into account all the pertinent costs of mine maintenance (on-site mine and administrative costs, royalties and production taxes, byproduct credits, permitting costs, smelting, refining, and transport) as well as behind-the-scenes costs that aren't often associated with on-site mining but still factor into overall expenses. These include corporate general and administrative costs, sustaining exploration and study costs, sustaining capitalized stripping and underground mine development, and sustaining capital expenditures, to name a few.” https://www.fool.com/investing/2017/04/21/3-gold-stocks-with-the-lowest-all-in-sustaining-co.aspx
Simplistically speaking, this is the term used to describe the total operational costs to get gold out of the ground and into doré bars. (Not yet refined to 9999 finegold)
Such research will find that typical AISC costs in 2017 ran about 50% of the spot price of gold.
So, if the spot price on a gram of gold is $46, it costs the large mining operation about $23 to get it out of the ground. They then can sell their doré bars to a refiner. By the way, the refiner does not pay spot price either because of the impurities in raw gold, the purity level can run anywhere from roughly 50% to over 93% purity. (100% pure gold does not exist in nature) The refiner will first assay the gold to see what it is worth before making an offer to buy from the miner.
Consider this list of All-in Sustaining Costs for some of the largest gold mine corporations in the world: Note: in 2016 when this data was reported, the spot price was around $1300/oz.
Most gold is melted down and used for industrial/jewelry uses. Therefore, comparatively speaking, there is not a lot of placer gold available for sale in paydirt.
However if a large mining operation focused exclusively on placer gold and sold all their gold in the form of paydirt, they could maximize their profits, and yes, sell at spot and still make a significant profit.
But frankly, the gold paydirt market is not large enough to invest millions of dollars in inventory, waiting on those of us who pan for gold for the enjoyment of it, to place an order.
Neither the purity of the gold, nor the size of the gold contained in a paydirt product is the primary pre-requisite for making a purchase…the primary question for a lot of buyers is will there be any gold at all and will I not end up with dirt clods from somebody’s back yard?!
True, there are a lot of unscrupulous paydirt sellers out there, but if the paydirt community collectively shares with one another which paydirt sellers deliver good gold, the market will self-regulate. Remember, if something sounds too good to be true, it probably is!
The bottom line: Paydirt sellers are NOT selling bullion gold based on the spot price, they are selling the experience, the Eureka moment of seeing gold appear in the gold pan, and that is priceless!
Therefore, their asking price can be as high or as low as they choose. The market, those of us who buy gold and/or gold paydirt, will determine whether they stay in business.