Are you interested in owning gold bullion? If so, you can invest in gold bars, rounds, and coins. Their prices are closely tied to the spot price of this precious metal, which is determined daily.
Bars, rounds, and coins are mainly manufactured with stamping. The press used in the process is capable of stamping various words and designs into precious metal, such as the metal’s fineness, mint name, country, etc.
There are various informative sites, such as InvestingInGold.com, providing useful information on alternative investments.
Here is everything you need to know about gold bullion.
What is it?
Bullion stands for physical gold of high purity, taking the form of coins, bars, and ingots. It has to be a minimum of 99.5 percent or 99.9 % to be considered of high purity. Also, a large number of governments and central banks hold it as a reserve asset. In order for bullion to be created, mining companies are supposed to discover gold ore and remove it from the earth.
Moreover, the ore represents a combination of mineralized rock and gold. This precious metal is extracted from the discovered ore by using heat and chemicals. The ultimate result is named parted bullion, as it contains a single precious metal. As mentioned before, it is stored in the reserves of central banks. It can also be used by institutional investors to protect their portfolios against inflation.
Banks use these reserves to settle debt on an international level or to incentivize the economy through lending. For instance, the central bank lends this precious metal to bullion banks at a certain rate of approximately one percent. These banks participate in various activities in the precious metals market, such as risk management, hedging, vaulting, trading, or acting as middlemen between borrowers and lenders.
How do Banks Sell and Lend it?
When central banks lend gold to a bullion bank for a limited period, like four months, the former receives a cash amount that equals the value of the lent precious metal. This sort of lending is performed at a specific lease rate, published on a daily basis. Naturally, when the lease rate is higher, central banks are more stimulated to lend bullion from their reserves. Find out more about the history, activities, and goals of central banks.
Bullion banks, on the other hand, are provided with two options, to either sell the commodity they have borrowed or lend it to mining companies. By selling it in the spot market, they will receive cash in return for the transaction. This market is the place where trading of bullion and other types of commodities happens at a given market rate. The more this market is supplied with gold, the lower the price of the precious metal. Once the loan period ends, the bank is required to purchase the commodity back and return it to the lender.
Furthermore, banks lending gold to mining companies usually take such a step to finance projects run by these companies. Mining firms also borrow bullion if they have just entered a forward hedge contract. These contracts are signed when gold is pre-sold to purchasers, although it hasn’t been mined yet. When buyers ask for physical delivery of the gold, the mining company borrows it from a bullion bank and then delivers it to the buyers.
The Bullion Market
There are several such markets on a worldwide level, open 24/7. The transactions on these markets are either performed over the phone or electronically. The bullion price is influenced by various factors, such as the demand from firms using gold for the purpose of making jewelry or other products. Additionally, the price is affected by the economy, as gold tends to become a popular investment during periods of economic instability.
Physical gold is preferred by most investors, as its price soars in periods of geopolitical crises like terrorist activity, war, and other instabilities. Inflation goes in favor of the price of this commodity as well. When overall prices rise, the value of commodities soars too. Therefore, many investors wish to have it in their portfolios.
How to Make an Investment?
Investors are provided with multiple ways to invest in gold bullion. Nevertheless, just like other investments, commodity prices have a tendency to fluctuate. For example, investors can purchase gold in physical or paper form. Gold bars and coins can be bought from a dealer and then stored in a safe deposit box in banks or third-party depository providers.
Moreover, individuals can invest in this asset in an allocated bank account, holding it on behalf of the client. In such cases, clients are provided with full ownership and should have no fears if the bank experiences bankruptcy. Creditors cannot claim the bullion, as it doesn’t belong to the bank but to the client.
Another investment alternative is investing through exchange-traded funds (ETFs). These allow investors to access the bullion market. They receive gold certificates, which can later be exchanged for bullion or cash. ETFs can be purchased and sold via a brokerage account or an IRA account, imposing low fees.
Futures contracts are another form of investment suitable for investors with more experience. A futures contract actually represents an agreement to purchase or sell a commodity at a pre-determined price on a preset date in the future. The seller is obliged to deliver the commodity to the buyer at the expiry date of the contract. Until this delivery takes place, the investor doesn’t own any gold.
Additionally, the price of futures contracts can reach surprising $100,000 per contract. As a result, many investors use the opportunity to borrow on margin, referring to taking a loan from a broker. Even though futures can be quite profitable, they might result in substantial losses as well. The price of bullion can change adversely, which is why you need more experience for making such an investment.
The bottom line
Alternative investments have been a real trend in recent years.
Why not join it?