Updated Feb 20, 2022

What Are Bullions?

What Are Bullions?

Introduction

Trading does not only mean physical commodities, stocks and shares. In fact, in the trading market, investors can also trade bullions which is the market for precious metals like gold and silver. The bullions market is always open, and these commodities are generally traded in physical form through banks or other financial institutions that have the right to keep them in reserve.

Bullions are defined as gold and silver, which are at least 99.5% pure, and are kept in the form of bars or ingots that are metals in the form of shapes to facilitate safe transportation. To produce these bullions, they are first discovered by a mining company in the form of gold ore or other material, after which the pure gold is extracted. Pure bullions are also called parted bullions, and bullions that contain more than one metal are known as unparted bullions.

What is a Bullion?

Many times, bullions can be looked at as legal tender with which investors trade. These bullions can be used to diversify one’s portfolio or even protect an investor against possible inflation prices. Approximately 20% of mined gold is held by central banks and other institutions and used as a reserve commodity in case they need it to settle the international debt or lend it to stimulate the economy. The central banks lend bullions at a rate of 1% to help raise money.

In the precious metals market, bullion banks participate in activities like clearing, risk management, and hedging. These banks also act as middlemen between traders and buyers who wish to partake in these activities. Nearly all bullion banks are part of the London Bullion Market Association (LBMA), which is an over-the-counter trading approach in bullions, and offers little to no transparency about the nature of the trade.

How Do Banks Buy and Sell Bullions?

When a bank lends bullions for a specific time period, it receives the cash equivalent for the bullions. It then leases the bullions out at a Gold Forward Offered Rate (GOFO), which is monitored by the LBMA. The higher the rate, the more incentive the bank has to lend bullions out. If the bullion is sold on the market, then the bank will receive cash for the transaction. However, if the bullion supply is more, then the price reduces. This makes it easier for the bank to buy back the bullions it has lent.

If a bank is lending gold to a mining firm that has not yet extracted the gold, then the agreement enters into a forward hedge which means that the buyers will demand some physical form of the bullion at a pre-sold price. This amount is then repaid to the banks.

How Does Investing in Bullions Work?

There are many ways in which bullions can be traded in the market, and knowing the higher value stocks help in making more informed decisions. Although gold tends to have greater demand, both gold and silver bullions are considered safe investments. However, the safer the investment, the higher the price fluctuation, and this means investors stand to lose much more than just their money. Some of the most popular methods of trading bullions are:

1. Physical Form

Traders and investors can buy physical bullions from a bank and keep them safely with them or in a deposit box in the bank itself. One can also purchase bullions for a client who then has legal ownership of this asset. In this case, the creditor has no claim to the bullion as it belongs to the client.

     2. Exchange-Traded Funds (ETF)

Although ETFs are not equivalent to owning gold, they hold value almost as much significance. With ETFs, investors can buy bullions along with other securities and put them into their accounts. However, with this, a certificate of the relevant bullion needs to be shared or can be exchanged for the actual physical form of the bullion.

    3. Futures Contracts

In a futures contract, the investor can buy and sell bullions at a pre-set price, with the contract settling on a specific date in the future. Here, the seller commits to delivering the bullions to the investor before the contract expiry date. However, the investor sells the contract or rolls it forward to a new date if he does not want the bullions on the date mentioned earlier.

Conclusion

The bullion market is growing at a rapid rate, and many investors are seeing the benefit of investing in these assets. Although these investments come in physical form, it is much safer in the long run for many investors who only have to deal with price fluctuations which may or may not be detrimental to them. When it comes to bullions, they can be traded in a number of ways, but given the value of these assets, it is equally important to keep them safe.