The price someone is willing to sell to you is not necessarily the price you'd get for selling...
IT'S INTERESTING how people become accustomed to pricing, writes Miguel Perez-Santalla at BullionVault.
When we go to a retail store here in the United States of America, we accept the price which is posted for the product as the final price in most cases. And because of this retail phenomenon, we have come to accept in many cases the price quoted as the final price. So it is that many are not accustomed to thinking about where the price comes from.
To get over this hurdle we need only to look at what is common in our society when we're shopping for cars. We find out as much as we can about the cars, about what we need the car to be able to do, and the options we want included with it. We look at comparable cars and see the prices. We look to see the resale value of the car and how it holds compared to the full retail value when we go to buy it. Then we determine if we want to buy that car. Is it worth the money they're asking? Finally we determine what's the most were willing to pay for that vehicle.
This is essentially the same method that should be applied to almost all things we buy. And there's no reason why precious metals should be an exception. So the first question when buying gold or silver is really what do I want it to do for me? The second is how can it accomplish this? And finally what will I get paid for it when I go to sell? Put another way, what is its redeemable value?
All these are questions drive you to find price transparency. Another term for price transparency is price discovery. Because the more knowledge you have about a vehicle or product, the more you discover about how it should be priced. So of course this means that the price becomes more transparent.
Now getting back to our example about cars, how do we look up resale value? Well, prior to the internet we would look for publications that published that information. Take the most widely recognized, for instance, Kelly Blue Book, and then look up the previous year's model and see how they held up. Today we can do this on the internet. There is now greater price transparency compared to the past because it has become more freely accessible.
Price discovery is the reason that EBay has been so successful. In the past it was very hard to find out what for instance, a 1955 #39 Submariner Comic Book in great condition was worth. Now I can see, with a click of a finger, that it looks like it is offered at anywhere between $350 to $500 for this specific issue. Hence this is a guide for what I can sell this for, as well as a competitive outlet. I have discovered its value to its owners, the price that others are willing to part with it. But not until the actual auction is completed can I see what someone is willing to pay. This is when the real price discovery is made. The last time an exchange occurs is when its value becomes totally transparent.
So we come to the fun part. When looking at precious metals it isn't any different. Each transaction determines the value of gold, and that is how the market moves – whether someone is willing to buy or sell at a certain price. Don't you believe that you should know what something you are buying is worth before you buy it? Of course you should find out what someone is willing to pay for it at the same time. Just like the car, we want to know in advance what we will get when we go to sell the same thing.
When looking to invest in gold or silver you need to recall those things we discussed earlier, the criteria we set forth for our purchase. Once those points are determined – and we know what, how and why we are buying – then we can move forward and find out what other people are willing to pay for the item we are purchasing.
"Buyer beware" is one of the most vital ideas. And the most essential way to protect ourselves when buying is to find out independently what other people are willing to pay for that same item. If you're dealing on the internet – which many of us do nowadays – it should not be difficult. If a website or company only tells you what they're willing to sell the item to you for then there is no transparency and you don't know what you're getting yourself into.
This is why gathering information and being an informed consumer is important. A wise investor always wants to know the current value of what they're buying not just what it is being offered for. In other words, the price someone is willing to sell to you is not necessarily the value that you can get for the same item at that moment.
An exchange-based system is the best and most transparent form of pricing mechanism that exist. This is why big industries grew up around exchanges. We all have heard of the New York Stock Exchange or the Comex. These businesses grew because of the ability to serve their customers by providing a pricing mechanism which increased transparency and liquidity. This pricing transparency has in the electronic age become a more effective, immediate and informative model than ever before. In fact, pricing is now so fast, many wonder if computers have not become too fast for us humans to have the time to react properly to the information provided.
Still, with the advent of the internet and other information-technological advances, it has become easier overall for many to find the value of their goods or investments. The best method available to anyone is an exchange-based formula. Because on exchange-based systems, we can see the prices which other people are willing to sell and buy at. Most importantly for price discovery here and now, we can see the top price someone is willing to pay immediately for an item, as well as the lowest price some other person is willing to sell the same item for.
The great thing is that these are live and active prices, not wishes or intentions. In investment, as in everything else, it is supply and demand which dictates whether a price goes up or whether it goes down. But without perfect foresight, the best thing to know when you are buying is how much you would get if you were selling. This enables you to know roughly the cost of getting into the investment.
In the gold and silver markets there are many products and vehicles for investing. There are many variables that should be considered before doing so. Start with those I've mentioned here. And of all these the most important is price transparency. Because if you don't know what someone will pay for an item when you buy it, then you sure won't know what it's worth when you come to sell it.
Then you will be at the mercy of someone who has all the information you were lacking.