What Is Bullion Trading?

Today’s commodity market players have more investment vehicles than ever before. But one of the most intriguing and potentially rewarding has been around for more than 6,000 years: bullion trading. Despite such a long and established history, the bullion market remains cloaked in mystery for many market participants. 

What does bullion trading entail? Is it a worthy strategy for your investment portfolio?

What Is Bullion?

Bullion is the physical form of precious metals. Some familiar types of bullion include gold bars, silver coins and platinum ingots. 

The essential quality that defines bullion is purity. The material needs to be at least 99.5% pure after processing by a mining company to be considered bullion.

It’s believed that the origins of bullion trading go back six centuries. Gold and silver had become proper currency for trade, replacing the exchange of other goods and services. In time, these precious metals became economic barometers. For example, the “gold standard” is still a measure of the value of a country’s paper money and coins.

Today, bullion bars are primarily owned and traded by institutional investors. Central banks hold around 20% of mined gold in their reserves. These reserves are used in large-scale economic ventures like resolving debt between countries and lending to boost economic activity. 

Given the globally established value of gold and silver, many private investors seek to take advantage of the bullion market. How does the common investor gain access to it?

How Does Bullion Trading Work?

The bullion market never closes. Most bullion trading happens in London in over-the-counter markets, along with other major economic centers like New York, Tokyo, Shanghai and Zurich. Usually, bullion trades are managed electronically or over the phone.

Investing in bullion coins and bars is a lot like investing in traditional assets. Prospective buyers determine the current value and demand for precious metals. They analyze the long-term prospects of holding on to gold and silver. Finally, they choose the investment venues that work best for them and execute the transaction.

The classic perception of bullion investing is its physical image: mountains of gold bars held in massive volume inside a well-fortified bank vault. But market players can choose from other vehicles for bullion investing.

How You Can Purchase and Invest in Bullion

The modern investor has several options for getting into the bullion trade. These are three of the most common.

Physical Form

The most straightforward form of bullion investing, of course, is purchasing the physical item. Gold and silver bars or coins are offered by approved dealers and merchants. Transactions are commonly conducted through agencies like the American Precious Metals Exchange (APMEX) or through traditional dealers and online outlets.

Paper certificates are also considered to be physical forms of bullion. Rather than keep the gold bars stashed away in one’s basement, an investor can keep their precious metals stored in the bank that has issued the certificate of ownership.

Exchange-Traded Funds (ETFs)

An ETF is similar to a mutual fund in that it pools multiple investment vehicles into a sort of automatic portfolio. Unlike most mutual funds, ETFs can be traded on public platforms like the stock market. Many investors favor ETFs because they’re quick ways to diversify portfolios and don’t require physical ownership.

Most ETFs consist of assets that have something in common, such as Fortune 500 corporations, environmental companies or businesses with small-to-medium market values. A number of funds focus on precious metals and bullion, including the SPDR Gold Trust (NYSEARCA: GLD), iShares Silver Trust (NYSEARCA: SLV), Invesco DB Precious Metals Fund (NYSEARCA: DBP) and many more.

Futures Contracts

Another popular vehicle for investing is a futures contract. This is a legal agreement to exchange certain assets for a fixed price, to be delivered at a given future date. Investors commonly deploy futures contracts to manage anticipated price fluctuations.

Futures contracts come in long and short positions, which roughly correspond to buying and selling, respectively. Someone executing a long position wants to purchase the commodity at a guaranteed price in the future. The short position works the same way for someone wishing to sell at an agreed-upon rate.

The advantages of futures contracts include the considerable leverage they offer investors. For an initial capital investment far lower than the asset’s full value, a trader can lock in a future purchase at a predetermined rate. Even if the asset value dramatically increases by the agreed purchase date, the buyer only pays the price as given in the futures contract. 

Gold and silver futures contracts are issued by centralized institutions. This arrangement means that the exchange is more secure and that investment risk is minimized, if not avoided altogether.

Is Bullion a Good Investment?

Precious metals have historically been viewed as solid investments. Gold’s value corresponds to economic growth: When the cost of living increases, so does the value of gold. Many invest in gold as a hedge against future inflation that could reduce the value of paper currency.

Gold and silver are also globally recognizable assets. Their value and worth are generally immune to geopolitical turbulence and change. The production and selling of precious metals are highly regulated through trustworthy, centralized institutions.

What kind of investor is suited to bullion trading? Any investor who is conscientious and pays close attention to their portfolio could participate. Many bullion investors enjoy having tangible, material assets like gold bars or silver coins that are not as subject to the wild variations and speculative nature of stock shares.

Most bullion investors have a keen eye on the future. They see their investments as long-term propositions that could increase in value over time. But bullion trading also appeals to more casual investors. There’s something simple about gold bars. They’re uncomplicated and require less in-depth analysis than more complex investment assets.

As a prospective bullion trader, you should consider a few factors before executing a gold or silver trade:

Liquidity

Will the asset remain in enough demand that you can easily cash out?

Fees and Commissions

How much will a brokerage charge for the transaction on top of the price? For futures contracts, what is the initial margin you’ll be charged?

Storage

Will you maintain possession of the bullion, or will the bank keep it?

Insurance and Taxes

What premium will you have to pay to keep the assets safe? What local or federal tax laws might affect the cost of purchase?

Best Marketplaces for Bullion Investing

Investors have several options for bullion investing. Some of Benzinga’s most favored gold and silver marketplaces include:

A Historically Solid Asset

Bullion has a longer, more resilient history than almost any other investment avenue. Gold, silver and other precious metals have proven to be reliable instruments of economic growth for centuries. Whether bullion will be a cornerstone of your portfolio or an alternative investment vehicle, it’s worth taking into consideration.

Frequently Asked Questions