Costs That Eat Returns

What you will learn

• How the buy/sell spread on bars and coins works
• How storage and insurance costs add up over time
• How annual product fees and overnight financing on leveraged products are calculated
• How to find the break-even price after costs

Explanation

Gold pays no income, so every cost comes straight out of any price gain. Knowing the costs before you buy is part of a sound plan.

Spread on bars and coins

A dealer quotes two prices. The ask price is what you pay when buying. The bid price is what the dealer pays you when you sell. The difference is the spread. The price above the pure metal value is often called the premium. Small bars and popular coins usually have higher premiums per gram than large bars, because making and handling them costs more.

Storage and insurance

Gold at home can be stolen, and normal household insurance may cover only a limited amount; check your policy. A bank safe deposit box or a professional vault charges a yearly fee. Insurance may be extra.

Product fees

ETCs and ETFs charge an annual fee, often called the TER (total expense ratio), taken gradually from the product's value. You also pay order fees to your broker and the exchange spread.

Financing costs on leveraged products

A CFD position held overnight is charged overnight financing: an interest charge based on the full position value (the notional value), not just your margin. Brokers usually calculate it daily from a reference rate plus a markup. Futures do not charge this directly, but the price of later contracts normally includes a similar cost of carry.

Taxes are a further cost; lesson 10 gives a general orientation for Germany.

Worked example

Hypothetical example: Frank buys a 100-gram bar and holds it for 3 years. All numbers are invented round figures.

Assumptions: market price €100 per gram; dealer ask €102 per gram; dealer bid at sale is 1% below the market price at that time; safe deposit box €120 per year. Taxes excluded.

1. Purchase cost: 100 g × €102 = €10,200.
2. Storage over 3 years: €120 × 3 = €360.
3. Total money spent: €10,200 + €360 = €10,560.
4. If the market price is unchanged at sale, Frank receives 100 g × €99 = €9,900. Loss: €10,560 − €9,900 = €660.
5. Break-even bid price: €10,560 ÷ 100 g = €105.60 per gram.
6. Break-even market price: €105.60 ÷ 0.99 ≈ €106.67 per gram, a rise of about 6.7%.

Comparison with leverage: a CFD position with a notional value of €10,000 and a hypothetical financing rate of 7% per year costs about €10,000 × 7% ÷ 365 ≈ €1.92 per day, or about €115 for 60 days. A hypothetical ETC with a 0.20% fee costs about €10,000 × 0.20% × 3 = €60 over 3 years (ignoring changes in value).

Common mistake

Practice activity

Hypothetical: you buy 10 coins at €210 each. The dealer would buy them back today at €195 each. Storage costs €50 per year. (a) What is the spread in euros and as a percentage of your purchase price? (b) What total buy-back price per coin do you need after 2 years to break even?

Limitations: Real dealer spreads change with market conditions and are not always a fixed percentage.

Key takeaways

• Bars and coins carry a spread that you must recover before any profit.
• Storage and insurance repeat every year and raise the break-even price.
• ETC fees are small per year but continuous; order fees add up with frequent trading.
• CFD financing is charged on the full notional value and grows with holding time.

Next step

Next, you will learn how gold is quoted and how to convert between ounces, grams, dollars and euros.