Gold and Silver Investment: Hidden Profits for Middlemen

From Mines to Pockets: Why Gold & Silver are Con-Man Heaven

Gold and silver are not just shiny objects; they embody power, wealth, trust and are enduring symbols of wealth. Kings used to fill their treasuries with nothing but gold coins. Contemporary families continue to buy gold and silver jewellery for their wedding parties.

Investors think hugging the metals (Gold and silver investment) adds a measure of safety during times of economic uncertainty. The tale of gold and silver stands the test of time. 

But there is a darker side to the glimmer. The story of middlemen; traders, dealers, brokers and jewellers who profit off every step in the way. For middlemen, the gold and silver experience is the perfect playground. Every step of the journey of the metal is a money making opportunity.

Let's look at why the metals are a haven for middlemen, as well as a reminder for investors to remain vigilant. Let’s cherish the precious metals market!

The Constant Demand Loop for Gold and Silver Investment

Gold and silver are always in demand, and India is one of the largest markets for gold. Families buy jewellery during weddings, festivals, and special occasions. Investors buy it in the form of coins or bars as a safe asset. Banks hold gold reserves as a reliable hedge for their economy. There is even a demand for silver from electronics and solar panel industries. 

Take India, for example; every year there is a huge movement to buy gold during Diwali. There will be a huge crowd of buyers who visit the gold shops, and every buyer believes that they should buy gold for good luck and prosperity. This demand ensures there will always be something for the traders, which means they will never run out of business.

The jeweller earns on every ornament sold. The dealer earns on every coin sold. The broker earns on every bulk buy. The middlemen are constantly active all year round. Gold and silver will have demand in January as much as there is for October. It means endless opportunities for Middlemen in the gold trade.

Price Volatility Equals Opportunity

The key reason why gold and silver appeal to intermediaries is the way their price behaves. The prices of these metals are moving every day and sometimes every hour.  In contrast, fixed deposits usually reflect constant and consistent returns.

Gold price volatility deserves your attention. Gold prices swing in both directions fairly quickly. For example, during the pandemic, gold prices went to new record highs as people sought to 'lock-up' their money. Then as the markets stabilized, gold prices corrected. This swing then creates opportunity for middlemen to make a profit. 

Consider, a trader buys low and sells high.  A broker earns on every spread.  The traders and brokers don't need much swings to make profit.  For the trader/investor this volatility may seem risky.  For middlemen, volatility is a profit machine.  For them, it is as essential as the air we breathe.  

Liquidity at Zero Hour

Liquidity is one more factor that makes gold and silver desirable. Liquidity is about how fast an asset can convert to cash. Gold and silver are very liquid, in contrast to land or property, which can take months to sell; gold can be sold in seconds.

Middlemen appreciate this feature. A jeweler can buy the gold in the morning and sell it by the evening. A trader can buy and ship thousands of coins between markets within a few days; to them, more liquidity of precious metals equals less risk.

The investor holding gold bars knows he can sell them in an emergency. Still, the middleman (the jeweller) who sells to him has already made a profit. They stay liquid to ensure they never have money stuck. The speed of this movement makes the entire process efficient.

The Emotional Connection

Gold and silver are more than just financial commodities; they carry emotional factors too. The mother who can pass a necklace on to her daughter feels love not an investment; the family silver can evoke memories of connecting with ancestors.

This emotional connection makes buyers less price sensitive. A groom's family will buy gold to be used for the marriage ceremony, regardless of cost increases. A parent will still buy silver for their child's first birthday. These sentiments are what the middlemen are taking advantage of. The emotional connection to family values typically outweighs any rational aspects of pricing.

For example jewellers offer propositions during occasions such as Akshaya Tritiya in India by appealing to emotions ("buying something today is lucky"). And despite high prices; buyers dash in. Middlemen profit from turning emotional desire into sales.

The Role of Middlemen In Gold and silver investment

Let’s break the journey of these metals.

• Miners dig the metal.

• Refiners purify it.

• Traders move it across borders.

• Brokers arrange bulk deals.

• Jewellers craft it into ornaments.

The margin needs to be added at each stage. By the time the locket or coin reaches the person buying the unit, it is in the hands of many others who have gained margin beforehand. This scenario is paradise for a conman. There are unlimited positions to take margin or game the transaction.

The jeweller may incur exorbitant making charges. In other words, they may mislead the buyer by stating guarantees of purity, but will deliver less. For example, brokers may profit by controlling the spread price from buying and selling.

Real-Life Example: Wedding Season Rush

Gold has played a cultural role in India. In the Indian wedding season, buyers are paying lakhs on gold jewellery, as the price of gold rises, the demand of gold is also rising. In this demand the jewellers know that they cannot negotiate. Since they are aware of the demand, jewellers are increasing their making charges and also pushing out designs that they know are more costly to the bridal client. They know that bridal clients focus more on the ritual, than going to other jewellers to compare prices.

At that moment in time, all of the middlemen in that entire system are making their best profits. The trader selling physical gold to jewelers is also increasing his margins. This creates a chain reaction where every link in the chain makes money. For the end buyer, the cost multiplies.

Investors Can Still Win

While middlemen profit at each stage, there are still accounts where investors can benefit. Gold and silver can protect wealth during uncertain times. When inflation rises, the value of money falls. However, gold will usually rise. And when a currency weakens, gold shines as a truly global asset.

Silver too, has industrial demand. Solar panels are dependent on silver, and solar energy usage is continuously increasing. This means long-term demand, apart from jewellery. An investor with the right perspective on these trends should still be able to benefit from silver and gold wisely.

• Do not get dragged into emotional traps or dealer gimmicks. 

• Always have cost and market timing in mind. 

• Purchase when the costs are down. 

• Make sure you buy from trusted dealers, but do not be naive. 

• Avoid panic buying during weddings and festivals.

Many investors look at hedge against inflation with gold, while the role of traders and brokers in gold market ensures that margins and spreads stay alive

Gold and Silver Trading Risks of Over-Reliance

It is no surprise that India is the fifth-largest importer of gold. It holds one of the biggest gold reserves in the world. Gold and silver are valuable but they are not entirely without risk. Prices could stagnate for long periods of time. For example, gold fell from its 2011 peak, and it took many years before it came close to recovering. Even then, those investors who bought into the peak had to wait a long time.

A different risk is storage. If you keep the bars or coins at home, you're inviting theft. Bank lockers cost fees. And if you buy a large quantity, depending on other circumstances, you might have questions about taxing. Few middlemen will highlight these risks to you because it would only reduce their sales.

The expert investor must also balance gold with other investments such as equities or bonds. If you are too focused on one shiny asset, your income growth will not be maximized.

Gold & Silver Investment Opportunities: Final Thoughts

Gold and silver aren’t just metals taken from the ground. They are a product that has been perfected through generations of trust, tradition, and transactions. For middlemen, they are bliss, demand for them does not decrease, their price is fickle, liquidity is high, and the emotions attached to gold and silver are high.

But for investors, it is a two faced coin. With good timing and smart asset allocation gold and silver can protect wealth, and with blind emotion they can destroy it.

So the next time you are holding a shiny coin or a gold chain, think about the miners who dug it up, the traders who transferred it, the jeweller who fashioned it, and the middlemen who laughed all the way to the bank.