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.
An investor who wants to purchase precious metals can purchase them in physical bullion form or paper form. Gold or silver bars or coins can be purchased from a reputable dealer and kept in a safe deposit box at home, in a bank, or with a third-party depository. Also, you can purchase bullion in an allocated account at a bank that holds the bullion for the client. The client has full legal ownership of the gold. If the bank faces bankruptcy, its creditors have no claim to the bullion in the allocated account since it belongs to the client or owner, and not to the bank.
Exchange-Traded Funds (ETFs)
Although it’s not equivalent to owning gold, investing in gold or silver through exchange-traded funds (ETFs) allows investors access to the bullion market. ETFs are funds that contain a collection of securities while the fund typically tracks an underlying index. With Gold or Silver ETFs the underlying asset might be a gold certificate or silver certificate, and not the physical bullion itself. Gold certificates can be exchanged for physical gold or for the cash equivalent at a bullion bank. ETF funds can be bought and sold similar to equities using a standard brokerage account or an IRA brokerage account. ETFs typically have low fees and are easier for most investors to gain access to the bullion market instead of owning physical silver or gold outright.
Investors can also buy a bullion futures contract which is an agreement to buy or sell an asset or commodity at a preset price with the contract settling at a specific date in the future. With gold and silver futures contracts, the seller is committing to deliver the gold to the buyer at the contract expiry date. Until the delivery happens, the buyer will not own the gold, and will only be an owner of a paper gold contract. However, if the buyer does not want to own gold bars or coins, the contract can be sold before the expiry date or the contract can be rolled forward into a new one.