A Guide To Understanding Bullion

How familiar are you with bullion? It refers to the bars and ingots made of pure gold and silver, attracting the attention of investors.

These precious metals are safe havens for investors, providing protection in turbulent economic times. For centuries, experienced capitalists have been aware of their importance and introduced them into their portfolios.

Bullion investment opportunities include investments in a physical form, ETFs, and futures contracts. Nowadays, there is a myriad of precious metal dealer reviews, such as https://www.bondsonline.com/cornerstone-bullion/, which investors should check out before choosing such a dealer.

We hope the following guide is of assistance.

What is it?

Bullion is a term used to describe gold and silver, whose purity is officially acknowledged to be a minimum of 99.5 % or 99.9 %. It takes the form of bars or ingots, mainly stored in the reserves of central banks and governments.

The creation of bullion commences with the discovery of gold by mining companies, followed by its removal from the earth in the shape of ore. The ore is actually combined mineralized rock with gold. The precious metal has to be extracted from it by being subjected to extreme heat and chemicals. If the bullion is pure, it acquires the name parted. Conversely, if it contains more than a single precious metal, it’s named unparted bullion.

Moreover, bullion is sometimes used as legal tender, meaning it’s recognized as a means for settling public and private debt. Nevertheless, it’s also used by investors who intend to diversify their portfolios and use it as an inflation hedge. Almost twenty percent of mined gold is kept as bullions in the reserves of central banks everywhere in the world. These banks have the right to use it in the settlement of international debts or as a way to incentivize the economy by lending it to bullion banks.

These banks play an important role in the market for precious metals by acting as middlemen between borrowers and lenders. The activities in which they’re engaged involve trading, hedging, vaulting, risk management, etc. Click here for a definition and description of risk management in finance.

How do banks sell and lend bullion?

Central banks lend gold to bullion banks over a given period, for which they obtain the cash value of lent precious metals. Then, central banks lend the cash they receive at a rate named GOFO. When the lease rate is higher, central banks are more stimulated to lend gold from their reserves. The banks who borrow this precious metal can either lend it or sell it to a mining company.

Furthermore, the spot market is the place where the trade of bullion and other commodities takes place at the current market rate. Hence, the banks that borrow gold from central banks sell it on the spot market in return for cash. Whenever the supply of this precious metal increases, its price drops.

When lending gold to mining firms, bullion banks do it for the purpose of helping them finance a company project or to support the forward hedge contracts they’ve entered. These contracts are signed when mining companies pre-sell gold to buyers, even though the metal hasn’t been mined yet. Hence, these companies can make the promised deliveries to the buyers by borrowing gold from a bank and repaying it from the mining output in the future.

Where is it traded?

The bullion market is where bars and ingots are traded 24/7. The transactions are made either over the phone or electronically. There are a couple of such markets worldwide, like in New York, Zurich, London, and Tokyo.  The price of gold bars and ingots is influenced by the demand from companies using this precious metal in making jewelry, as well as the overall economic situation. In times of economic instability, it becomes a popular investment.

Not only gold but also silver bullion are considered secure investments when geopolitical crises take places, such as during terrorism or war. Any type of geopolitical risk, conflict, or instability boosts the price of these precious metals. In times of inflation, the prices of commodities rise as well.

Not only gold but also silver bullion are considered secure investments when geopolitical crises take place, such as during terrorism or war. Any type of geopolitical risk, conflict, or instability boosts the price of these precious metals. In times of inflation, the prices of commodities rise as well.

How to make an investment?

There are multiple ways of making bullion investments, which like the other forms of investments, carry a risk of loss because of the fluctuating prices. One of the alternatives is the investment in a physical form, such as gold and silver bars and coins. These can be stored at home in a safe deposit box, in banks, or by third-party depository providers.

Moreover, investors can gain access to the bullion market via exchange-traded funds (ETFs). Gold and silver exchange-traded funds take the form of certificates, not actual bars and coins. Investors can exchange these certificates for bars or coins, as well as for the equivalent cash amount. These funds are like equities when it comes to buying and selling, as investors must have a brokerage account or an individual retirement account. The access to the market provided by ETFs is much easier, and the fees are relatively low.

Futures contracts are another investment opportunity for investors, referring to the agreement of buying or selling commodities at preset prices at specific future dates. By committing to a futures contract, the seller is obliged to deliver the precious metals to the buyer at the contract’s expiry date. Until the delivery takes place, the buyer cannot own the gold, not even in the form of a paper contract. Nevertheless, in case the buyer refuses to own bars or coins, there’s a possibility for the contract to be sold prior to the date of expiration.

Investors should be aware that futures don’t trade in shares, only in contracts. Hence, the price can be as many as $100,000 for a single contract. Also, futures are best suited for investors with an experience record in the world of trading. While they can be incredibly profitable, the risk of losses is relatively high.

Final thoughts

Make sure you understand all risks before making an investment!