Guarantee Buy Back Sustainability
This section would give a deeper thought on Guaranteed Buy Back option.
A lot of first time silver investor do prefer Guaranteed Buy Back option up front. Novice silver investors often ask seller whether the seller would provide Guaranteed Buy Back. As a result, more and more silver sellers are offering Guarantee Buy Back to attract new fresh silver investor who are worried about having trouble liquidating their silver. The question is, can the silver sellers really keep their promise when buyers are selling back to them? Which means, if you one day bring back the silver items to the seller, will the silver seller buy them back from you?
The answer is yes and no, depending from which seller we are talking about. One of the sellers that I believe they are able to keep their Guaranteed Buy Back policy is 1StopGold due to their strong financial support from the parent company. This is the only company I have confident, I would reserve my opinions on other sellers.
They are other sellers are offering Guaranteed Buy Back but I suspect not many of them could keep their promise under certain circumstances. I will cover what are the certain circumstance later. First, let’s look at what the sellers have in mind when they are offering Guaranteed Buy Back.
First of all, when a seller is making a Guaranteed Buy Back policy, the seller must have a reasonably large amount of cash reserved# for buying back from buyer. For Guaranteed Buy Back that offered by an individual seller, if the seller do not have this large amount of cash reserved, one buyer who wants to sell back 100oz at a go could easily break the seller’s Guaranteed Buy Back policy. Do not be surprised by the number of people who already owned more than 100oz. In fact, I have seen people who buy 100oz of silver in one go. Due to the fact that silver is still relatively cheap, the largest amount of silver transaction I have ever seen is more than 500oz silver being locked in one night. Do not forget that that is only one night of his sales. Imagine if the seller who just sold the 500oz of silver offers Guaranteed Buy Back, I seriously doubt if he could keep his promise of buying back all the silver items he has ever sold. In short, any seller who has Guaranteed Buy Back but has not prepared himself to buy back more than 100oz at any point of time is basically betting their luck that there is no such buyer would sell back in big quantity.
Secondly, sellers are assuming that the silver investors who are buying are always more than silver investor who are selling back. The cash flow would always remains positive as long as the above assumption holds true. This is what the sellers are betting on. This assumption could be a deadly mistake as this assumption has many flaws in it.
During good economy time, demand for buying will always more than selling back, but how about during bad economy time? Less silver investor will buy (because they do not have spare cash to spend) and more silver investors will sell (because they need cash to buy food to feed their children – for example). How many silver sellers do you think can sustain in bad economy time and keep buying back from buyers without selling much of the stock?
Let’s consider another scenario. Assuming today silver price is USD 30, due to certain news, silver price shoot up to USD 33 within 24 hours. Since there is a Guaranteed Buy Back policy, some silver investors who has bought silver at below USD 30 would want to liquidate some (or all) of their silver back to the seller, to cash out profit. The seller must buy back the silvers if the seller would like to keep a good credibility on the Guarantee Buy Back policy. Here is the most important part during a sudden price hike, there will ALWAYS be more silver investors withhold from buying and there will ALWAYS be more silver investors who sell the silver back to the seller for a profit. This is the situation, none or very little investors are buying, a lot of investors are selling back to the seller. With such business model, the seller would not be able to sustain too many times of price hike.
I once had an discussion with a friend who owns a precious metal mintage company on his view on Guaranteed Buy Back policy. Generally he does not agree with such policy because he told me this not a sustainable business model. Apart from some of the points I stated above, he shared with me a very interesting insight about “making money” from the sellers who offers Guaranteed Buy Back policy. All silver sellers are charging a mark up (as a profit) for the silver they sell. Although seller with Guaranteed Buy Back policy is buying back the silver at a big discount, the price is still more expensive than the cost for the seller to order the silver from his supplier. Let me put this into illustration (rounded to nearest 100 for easy explanation):
Seller could buy silver from his supplier at RM 3400 / kilo
Seller selling silver to buyer at RM 4100 / kilo.
Seller spread is 12%
Seller buying back from buyer at RM 3600 / kilo
The problem with above scenario is the seller is making a loss of RM 200 whenever he buys back 1 kilo from the buyer. If the buyer could reach to the same supplier, the buyer can literally make RM 200 / kilo for buying and selling back the silver to the seller. Of course this could be a little more tricky as the buyer must be selling back the similar design of mintage and the buyer must have bought some silver from the seller. However these issues can be overcome easily. The point here is, the seller who offers Guaranteed Buy Back policy has loophole for buyer to exploit. The seller is only offering Guaranteed Buy Back in hope that it could attract more buyers and also betting that there are always more buyer buying than buyer selling at any point of time.
With all the examples given above, I believe you could see that Guarantee Buy Back is not a sustainable business model. In such unsustainable business model, do not be surprised if one day when you want to sell back your silver to the seller, the seller is no longer in business. Or if you are trying to sell a large quantity back to your silver seller during a price hike, the seller might not want to pick up your call. On the surface, Guarantee Buy Back seems to be a good assurance seller gives to buyer; underneath, most sellers prefer do not buy back from buyer. This topic might need extra effort for a novice silver investor to comprehend. If you are a novice silver investor who is buying less than 10oz, you simply do not need not need to worry about this. Go buy more silvers, come back visit this chapter in the next few months. By then this might make more sense to you.
In summary, it is good to have a Guaranteed Buy Back if it does not cost anything extra to the buyer. However, you also do not need to be overly excited when you found or are dealing with a seller who is offering Guaranteed Buy Back policy.
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