The bullion coin market differs from the numismatic market to which many collectors are accustomed. The bullion coin market operates in a tier system structured something like a pyramid, with the issuing authority at the top. The issuing government produces and then distributes the coins in large quantity through a narrow system of large distributors. Distributors in turn sell to wholesalers, who sell to a network of retailers, who then sell to the public. There is, of course, nothing to prevent a distributor or wholesaler from also being a retailer.
At each step down on the pyramid, the field widens. Let’s say, hypothetically, a government sells to 10 distributors. Each distributor sells to 10 wholesalers, for a total of 100 wholesalers. Each wholesaler then sells to 10 retailers, for a total of 1,000 retailers. The tiered distribution system is often referred to as the “pipeline.”
The most important function of the distribution system is in providing a buy-back market. Bullion coins are investments; investments must have a degree of liquidity.
Governments sell coins into the pipeline but will not buy them back. Selling the bullion coins through a network of private dealers enables a ready two-way market.
Large distributors absorb buy-backs while at the same time they hedge their positions in the marketplace and hold the coins until the market turns favorable. A small dealer, such as a coin shop or local bank, would place a serious strain on its liquidity if it were compelled to buy and hold coins from an investor taking a profit. And investors would not likely purchase coins for investment that could not be resold for profit.
The above is an excerpt from the eighth edition of the Coin World Almanac , published by Amos Media Company in 2011.