How does the bullion market work?: Precious metals basics

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.” 

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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.

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