What is a Precious Metals Dealer Anyway?

Precious metals dealer is a term used a lot, but understood very little...

SO WHAT MAKES a precious metals dealer ?

This term is bandied about loosely, and used by many people with no knowledge of the gold or silver market. But precious metals dealer is also used by others with a very specific meaning. So in reality, it is a term that has not been clearly defined in the eyes of both the trading community and the public.

Traditionally, the term "dealer" usually meant a company, involved in the trading of a commodity or product, which stood ready to buy or sell that item during trading hours. For instance, in the precious metals market we would call a gold dealer someone who stands ready to make a bid and offer price on gold for a minimum of 500 ounces at a time.

Of course this doesn't limit the dealer to trading this amount; it just means that they stand ready to be a market maker for the item, which is another term – in this wholesale context – for dealer.

Such firms are typically larger, and only deal with companies in the same industry. So in precious metals, their counterparties may be banks, refineries, consumers or producers of gold, silver, platinum or palladium. These dealers would not typically trade with you or me as private individuals, nor with companies that are not actively involved in the precious metals business.

However, the term "precious metals dealer" later evolved to refer to businesses which are involved with the distribution of product to the retailers of coins, bars and bullion who then finally make a sale to the public. These institutions, who typically inventory product for sale to companies such as coin retailers, jewelers, and investment companies, are considered middle-market distributors or wholesalers in other industries. However, because of the uniqueness of the gold and silver markets, they also participate in buying back merchandise, either to be held in their inventory or to be scrapped back to its original raw state by a refinery.

Since these middle-market distributors also make a two-way market, offering to buy or sell merchandise, it has led them to also attain the nom du jour of precious metals dealer. There is no doubt that they are active participants in the marketplace. But even though they will always have an interest in buying and selling bullion products – since this is their business, after all – it does not mean they must always show the best buying price or selling price at any given time. There is nothing unjust about their ability to determine pricing. They are subject to the market ebbs and flow just as much as in any other marketplace, and must adjust their pricing accordingly. Which will include a mark-up from the base wholesale price (or discount when they're buying back) to ensure they turn a profit.

Then there is the final level of business where the term precious metals dealer is now used. Here it is real a misnomer. At the retail level there are many precious metals companies, coin shops, pawnshops, and scrap collectors that do deal direct with the public. These people are not direct dealers in any sense because they rely on their distributors or market makers for making their prices to the market. But because government authorities needed to give this business a title, they chose one that worked best for them.

It would have been more adequate to call them vendors or service providers of precious metals, rather than precious metals dealer. This is not meant to degrade these retailers in any sense. It is only to describe properly what their primary purpose or position is in the marketplace. These businesses traditionally are those that promote the sale, and or purchase of gold and silver products or services to the public through advertising or media campaigns. They are an important part of the marketplace, especially for those private citizens wishing to take physical possession or ownership of gold or silver bullion.

But the term precious metals dealer is being used with different meanings by different people across many related industries, now including banks, money service businesses, trusts and administrators of self-directed IRAs. And because the precious metals market, especially gold, has only recently taken a pause at last from what proved a 12-year bull run, many new companies have surfaced to supply the demand from would-be investors. Many of these new companies are reputable and well recognized by their quality of service and the products they provide. However, several cases of fraud and unfair dealing have come up, some more high profile but others more under the radar. And historically in all industries, the stage most susceptible to fraud is the final provision to retail customers.

This is why anyone looking to work with a precious metals provider for gold and silver products should take the time to do proper research. Whatever level of business you're looking to conduct, here's a checklist of what you should do before entering into a financial transaction with any precious metals provider, be they a "dealer" or otherwise:

As Jim Rogers told me in my recent interview with him on New York Markets Live, "If you cannot spell gold you should not own any gold until you learn something about it." And as we've seen with the term precious metals dealer, improving your own understanding goes a long way to getting you a better, safer deal when you come to act.