Bullion
What Is Bullion?
Bullion is gold and silver that is officially recognized as being at least 99.5% and 99.9% pure and is in the form of bars or ingots. Bullion is often kept as a reserve asset by governments and central banks.
To create bullion, gold first must be discovered by mining companies and removed from the earth in the form of gold ore, a combination of gold and mineralized rock. The gold is then extracted from the ore with the use of chemicals or extreme heat. The resulting pure bullion is also called "parted bullion." Bullion that contains more than one type of metal, is called "unparted bullion."
KEY TAKEAWAYS
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Bullion refers to physical gold and silver of high purity that is often kept in the form of bars, ingots, or coins.
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Bullion can sometimes be considered legal tender, and is often held as reserves by central banks or held by institutional investors.
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Investors can buy or sell bullion through dealers who are active on one of several global bullion markets.
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Investing in gold and silver bullion can more easily be accomplished via exchange-traded funds (ETFs) or futures contracts.
Understanding Bullion
Bullion can sometimes be considered legal tender, most often held in reserves by central banks or used by institutional investors to hedge against inflationary effects on their portfolios. Approximately 20% of mined gold is held by central banks worldwide. This gold is held as bullions in reserves, which the bank uses to settle international debt or stimulate the economy through gold lending. The central bank lends gold from their bullion reserves to bullion banks at a rate of approximately 1% to help raise money.
Bullion banks are involved in one activity or another in the precious metals markets. Some of these activities include clearing, risk management, hedging, trading, vaulting, and acting as intermediaries between lenders and borrowers. Nearly all bullion banks are members of the London Bullion Market Association (LBMA), an over-the-counter (OTC) market which offers little to no transparency in its dealings.1 OTC markets are dealer networks for financial products, commodities, and securities that don't trade on a centralized exchange.
The Bullion Market
Bullion is traded in the bullion market, which is primarily an OTC market open 24 hours a day. Trade volume in the bullion market is high since it includes the vast majority of bullion trading prices throughout a given day. Most transactions are completed electronically or by phone. There are various bullion markets globally, including in London, New York, Tokyo, and Zurich.
The price of gold bullion is influenced by demand from companies that use gold to make jewelry and other products. The price is also impacted by perceptions of the overall economy. For example, gold becomes more popular as an investment during times of economic instability.
Although gold tends to have greater demand, both gold and silver bullion are viewed by many investors as safe-haven investments. The safe-haven status usually leads to price increases during geopolitical events such as war, terrorist activity, and any instability that can lead to a conflict. Also, global financial issues such as a fear of a government default on debt or the financial collapse of a country lead to increased demand for bullion.
Rising prices or inflation in an economy tend to erode the return on investments. If an investor, for example, earned 4% on a bond and prices rose by 2%, the return on the bond investment was only 2% in real terms. If overall prices are rising, commodities tend to rise as well. As a result, gold and silver bullion are used to hedge investment portfolios against inflation.
Purchasing and Investing in Bullion
There are various ways to invest or own bullion. Please note that similar to any other investment, bullion prices can fluctuate, meaning there's a risk for loss. Below are a few of the popular ways that market participants invest in bullion.