During my early investment days, I came across the term bullion and I had no idea about the meaning of it. I imagine there are many folks out there in exactly the same position I was during my early days. In this article, my aim is to answer the question of what is a gold bullion and how the markets use it.
What is a Gold Bullion?
What is a gold bullion, and how it can be a tool of investment? Gold bullion is when gold itself has been refined to such a degree that it is now in its purest form.
The word bullion comes from the French Minister of finance Claude de Bullion. The value of the bullion is determined by the value of the precious metal content, which is defined by its purity and mass.
Many people actually confuse gold bullion with large gold bars. In fact, gold bullion can be small golden bars from 1gram to 1 kilo and even more. In addition, gold coins are also considered to be gold bullion.
The specifications of bullion are regulated by market bodies or legislation. In the European Union, the minimum purity for gold bullion is 99,5% for gold bars and 90% for gold coins.
Gold Bullion Characteristics
- Gold bullion is gold in its purest form often kept in the form of coins, bars, or ingots
- Gold bullion is not just an asset in many cases it has been considered to be a legal tender
- Central Banks and other institutional investors hold large amounts of gold bullion
- Investors small and large can buy gold bullion through specific dealers
- Investors can also put money in gold bullion through exchange-traded funds (ETFs) or futures contracts
Why Central Banks Hold Gold Bullion
It is estimated central banks hold 20% of the gold bars mined. Central banks hold gold bars for a number of reasons. One of them is to protect their portfolios from inflation and a market downturn. In addition, they use gold bullion to settle the international debt or to stimulate the economy through gold lending.
Moreover, central banks sell and lend gold to other banks and mining companies. Gold is a useful tool in the hands of the central banks.
Why Investors Buy Gold Bullion
- Portfolio diversification
- A hedge against inflation
- Geopolitical uncertainty
- Currency risks
- Political instability
- Gold is a non-correlated asset (its price tends to rise during a market downturn)
How the Price of Gold is Determined
The price of gold bullion is influenced, by demand from companies who use gold to make jewelry and other products, and by perceptions of the overall economy. For example, political, or financial instability, affects the price of gold bullion.
Gold Bars or Gold Coins?
When the time comes to invest in physical gold you could find yourself wondering what would be better gold bars or coins? I am in favor of gold bullion coins as they are easier to store and sell rather than bars.
However, gold bullion bars are still an excellent way to invest in gold. Bare in mind, that it could be better to own ten 100 gr bullion bars rather than a 1-kilo bar. It is much easier to sell the ten 100-gr bars rather than the 1-kilo bar.
Ways to Invest in Gold Bullion
There are many ways an investor can obtain gold bullion. This can be done in physical form, (physical gold I recommend) gold coins, bars, or even ingots.
Another way for the investor to get access to the bullion market is through exchange-traded funds. (ETFs) Gold ETFs are securities that track the gold market. Gold ETFs are the easy way to own gold and it can be done through a standard broker or an IRA broker.
The futures market is another way for the investor to enter the bullion market. A futures contract is an agreement to buy or sell a commodity or an asset at a particular price with the agreement ending at a preset date. You can invest in futures through a broker but I do not recommend it. A futures contract might lead you to extremely high gains and it might also lead you to bankruptcy.
Gold bullion is a popular investment asset. Institutional investors, central banks, and smaller investors are including gold bullion in their investment portfolios for their own reasons.