What is Gold Bullion? Definition, Types and Investments
11/05/2023Daniel Fisher
Overview Of Gold Bullion
Gold bullion, a tangible and highly sought-after investment option, captivates financial enthusiasts and experienced investors alike.As a crucial component in wealth preservation and portfolio diversification, gold bullion comes in various forms such as gold bars and gold coins.
This article explores the world of gold bullion, providing a comprehensive understanding of its significance, the different types available, and the role of the London Bullion Market Association (LBMA).
Importance of Investing in Precious Metals
Investing in precious metals like gold and silver offers numerous benefits for investors:
- Tangible assets
- Hedge against inflation
- Protection from economic uncertainties
- Minimised risks associated with other investment options like stocks and bonds
By understanding gold bullion’s intricacies, investors can make informed decisions on incorporating it into their wealth management strategies.
So What is Gold Bullion?
Definition of Gold Bullion
Gold bullion refers to physical gold in the form of bars or coins, with a minimum purity of 99.5% for gold bars and varying purity for gold coins. It serves as a popular investment vehicle due to its:
- Historical store of value
- Market stability
- Potential to provide returns in times of economic turbulence
Comprehensive Guide to Buying Gold Bullion
Gold Bullion Bars and Gold Bullion Coins
There are two primary forms of gold bullion:
- Gold bullion bars, also known as ingots, are rectangular slabs of gold with varying weights, typically ranging from 1 gram to 400 troy ounces. They are stamped with their weight, purity, and a serial number for identification purposes.
- Gold bullion coins are minted by governments and bear legal tender status. Although their face value often falls below their actual gold content, these coins derive their worth from the precious metal content and their scarcity, design, or historical significance.
Specifically, gold bullion coins get their name from the way they’re minted. The term ‘bullion finish’ refers to the process in which gold coins are minted and the look of the final product. This relatively low-cost method of bullion coin production allows up to 250 gold bullion coins per hour to be produced. The simple finish of bullion coins is aimed at providing investors with lower premium coins. In contrast, proof coins are more expensive to produce as they require special dies which last for fewer strikes. Each coin is struck multiple times, with the die being polished in between strikes to produce a mix of polished and matt finishes on the coin.
Proof coins are far less common than standard bullion coins, so the term gold bullion tends to predominantly be used to refer to gold bars within the precious metals world.
Difference Between Gold and Silver Bullion
While gold and silver bullion share similarities in their tangible nature and investment purposes, they differ in several aspects:
- Gold is typically considered more stable and valuable, with a higher price per ounce compared to silver.
- Silver bullion is more accessible for investors with a smaller budget and offers higher potential for industrial demand due to its wide range of applications.
- Gold bullion benefits from being VAT-exempt, but silver does not so be aware of the extra 20% on your purchase price.
London Bullion Market Association (LBMA) and Its Role
The London Bullion Market Association (LBMA) is a key player in the global bullion market, responsible for:
- Setting international regulatory standards for gold and silver trading
- Ensuring that bullion products meet minimum acceptable fineness and quality requirements
By providing a trusted and transparent marketplace, the LBMA plays a crucial role in maintaining the credibility and integrity of the gold and silver bullion market.
The Two Main Types Of Gold Bullion Products
1. Gold Bullion Bars
Sizes and Weights
Gold bullion bars come in a variety of sizes and weights to cater to diverse investor needs.
The most common weights for gold bars range from 1 gram to 1 kilogram, with larger sizes like 10-ounce or even 400-ounce bars available for institutional investors. The weight of gold bars is typically measured in troy ounces, with one troy ounce equivalent to 31.1035 grams.
While bullion weights in Europe are almost exclusively referred to in grams due to the embracing of the metric system, North America still prefers weights in imperial ounces.
Types and Brands
Gold bars can be produced in one of two ways - minted or cast bars
Minted Gold Bars
These bars are cut from one large sheet of gold which has been rolled to a consistent thickness. The special die will be set to punch the sheet into a set size and weight of blanks. These blanks are then put through a minting press to create the required design and information on each side.
A majority of minted bars are then encapsulated in a protective plastic laminated wallet which will contain the serial number and assayer details. These bars are popular with investors as they are cut and finished to perfection and the wallet provides durability and an attractive finish.
Cast Gold Bars
The manufacturing approach to cast bars is completely different. Molten gold is poured into bar-shaped moulds and then cooled down to set solid. This creates a more natural rustic finish, usually with rounder edges than minted bars. The solid bars are then printed using a press with the required Manufacturer name, weight, purity and individual serial number. Cast bars tend to also come with a separate paper certification but are not laminated.
Most of the major gold bullion producers tend to make their smaller bars weighing 1g to 100g in minted form, as they tend to be more popular amongst retail investors. Larger sizes in the range then tend to be produced using the cast method. These tend to include 250g, 500g, 1kg and upwards. Cast production is slightly cheaper which suits the requirement for lower premiums on the larger size bullion bars.
It’s common for manufacturers to produce some of the most popular mid-weight retail bars such as 1oz and 100g in both minted and cast versions. This provides choice for consumers where personal preference may play a role.
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2. Gold Bullion Coins
Gold sovereigns are a popular type of gold bullion coin with origins dating back to 1489.
Originally minted in the United Kingdom, these coins contain 0.2354 troy ounces of gold and have a legal tender status.
The gold sovereign’s design typically features the reigning monarch on the obverse and St. George slaying a dragon on the reverse.
Legal Tender Status
Most gold bullion coins are considered legal tender, which means they hold a nominal face value assigned by the issuing government.
However, their actual value far exceeds the face value, as it is determined by their precious metal content and market demand. Legal tender status adds an extra layer of security for investors, as it guarantees the coin’s weight, purity, and authenticity by the issuing government.
Crucially for investors, buying and selling legal tender gold coins from your country of residence is free from Capital Gains Tax (CGT).
Popular Gold Bullion Coins
Some of the most popular gold bullion coins among investors include:
Each coin carries a unique design and different levels of purity, ranging from 22 to 24 karats.
These coins are sought after by investors due to their worldwide recognition, liquidity, and the trust they hold as government-issued bullion.
Gold Bars vs Gold Coins
Both gold bars and gold coins offer investors the opportunity to own physical gold. However, they differ in several aspects:
- Gold bars generally have a lower premium over the gold spot price compared to gold coins, making them a more cost-effective option for investors seeking maximum gold content at a lower price.
- Gold coins carry a numismatic value due to their design, rarity, and historical significance, making them popular among collectors and investors who appreciate the aesthetic appeal.
- Gold bars can appeal to novice investors due to their serial numbers and certification. This can provide peace of mind regarding authenticity compared to gold coins, which aren’t accompanied with certificates.
The Gold Standard and Central Banks
Historical Context of the Gold Standard
The gold standard was a monetary system in which the value of a country’s currency was directly linked to a specific amount of gold.
First implemented in the United Kingdom in the early 19th century, it gained widespread adoption globally, providing stability and trust in international trade. However, the gold standard was abandoned by most nations in the 20th century due to its limitations, particularly during economic crises and wars.
Today, the majority of countries operate under a fiat currency system, where money is not backed by any physical commodity.
Role of Central Banks in the Bullion Market
Central banks play a significant role in the bullion market by managing gold reserves as part of their foreign exchange holdings.
They influence gold prices through their buying and selling activities, and by setting interest rates which indirectly affect the demand for gold as an investment.
Central banks also participate in the London Bullion Market Association (LBMA), contributing to the establishment of regulatory standards and ensuring the overall stability of the bullion market.
Cash Equivalent and Gold Reserves
Gold reserves held by central banks are considered a cash equivalent, meaning they can be easily converted into currency in times of need.
This classifies gold as a Tier 1 bank asset under the latest Basel Accords. This provides a safety net for central banks and governments during financial crises or when facing international debt obligations.
Holding gold reserves also helps central banks maintain confidence in their currency, as it signals their ability to support its value and maintain monetary stability.
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Quality and Purity of Gold Bullion
Claude de Bullion and the Origin of the Term “Bullion”
The term “bullion” is believed to have originated from Claude de Bullion, a 17th-century French politician who served as the Superintendent of Finances under King Louis XIII. While the word’s etymology is not entirely clear, it is commonly associated with precious metals in the form of bars or ingots, with a high level of purity.
Minimum Purity and Minimum Acceptable Fineness
Gold bullion must meet specific purity requirements to be considered investment-grade.
For gold bars, the minimum purity is generally 99.5%, while gold bullion coins have varying purities depending on the issuing country.
The London Bullion Market Association (LBMA) sets the minimum acceptable fineness for gold bars at 995.0 parts per thousand (ppt) fine gold.
This ensures that gold bullion products adhere to strict quality standards and maintain their value in the global market.
A vast majority of consumer focussed gold bullion from the major producers is refined in virtually pure 999.9 fineness gold.
Precious Metal Content and Fine Gold Content
The value of gold bullion products is determined by their precious metal content, specifically the fine gold content. Fine gold refers to the pure gold present in a bullion product, excluding any other metals or impurities. By measuring the fine gold content, investors can accurately assess the value of their gold bullion holdings and make informed decisions about buying, selling, or holding their investments.
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Trading Gold Bullion: The Bullion Market, Spot Market, and Futures Contracts
Overview of the Bullion Market and its Participants
The bullion market is a global network of buyers and sellers trading in precious metals, including gold and silver bullion.
Participants range from individual investors and experienced traders to central banks, mining firms, and large financial institutions.
The market operates 24 hours a day, with transactions primarily taking place over-the-counter (OTC) or on exchanges like the London Bullion Market Association (LBMA).
Trading Gold on the Spot Market: Buying and Selling Physical Gold
The spot market is where gold bullion is bought and sold for immediate delivery at the current market price.
It’s important to understand that the purchase price of a gold bar isn’t exactly at the quoted spot price of gold. Instead, the price will be calculated by adding a small premium to the spot price to cover costs such as manufacturing, transport, insurance and dealer’s margin.
The size of this premium will depend on the size, quantity and brand of bars being bought. The larger the bullion bar, the lower the premium.
Selling gold bars is usually at a price slightly below the current spot price of gold.
Most investors trade gold bullion on the spot market, as it provides a transparent and efficient way to purchase or sell physical gold.
Prices are typically quoted in troy ounces, and transactions can be settled in various currencies.
Investing in Paper Gold Contracts and Futures Contracts
Investors can also gain exposure to gold through paper gold contracts and futures contracts.
These financial instruments allow investors to speculate on gold prices without physically owning the metal.
While offering potential profits and portfolio diversification, paper gold investments also come with risks, such as counterparty risk and market volatility.
Role of Mining Companies and Mining Firms in Gold Production
Mining companies and mining firms play a critical role in the supply of gold bullion to the market.
They are responsible for extracting gold from the earth, refining it, and delivering it to buyers.
The performance of mining companies can directly impact gold prices, as changes in production levels, operational efficiency, and geopolitical factors can influence the overall supply and demand dynamics.
Conclusion
Gold bullion, as a tangible and sought-after investment option, offers numerous benefits for investors.
With a variety of forms available, such as gold bars and gold coins, investors can choose the type of gold bullion that best suits their needs and preferences.
By understanding the intricacies of gold bullion and its role in the global market, investors can make informed decisions on how to incorporate it into their wealth management strategies, providing a hedge against inflation, protection from economic uncertainties, and portfolio diversification.
