Traders and experts often discuss gold and the commodities market, but the specific terms “gold” and “bullion” are actually quite different.
While gold encompasses all forms of the metal and ways to trade in its market, including coins and bars, bullion includes the physical forms of other precious metals also traded, like silver and platinum. It’s important to understand these differences and the various forms gold can be invested in, so you can choose the best form for your goals and needs.
The Gold Market
Trading in the commodity market includes precious metals like gold, silver, and platinum. Historically, gold is valuable and has been used as currency. Its price remained relatively consistent until the 2008 financial crisis, when its price nearly doubled.
In 2019 the price of gold increased by 13%, while in 2020 it went up by an incredible 26%. By contrast, 2021 wasn’t a great year for gold, due, in part, to the Federal Reserve announcing that the banks would increase interest rates sooner than expected. That caused the price of gold to decline by almost 4% in comparison to 2020.
There are many reasons to invest in gold since it is often viewed as a safe option compared with other investments. It often happens that the value of other asset classes like the FTSE 100 goes down, while the price of gold goes up. Here are some of the reasons gold is a good investment:
- Preservation. Gold’s long history makes it an attractive, secure form of long-term investment and wealth preservation. Its value continues to grow slowly, though it is less impacted by inflation and volatility.
- Hedging. Generally, gold maintains its value or prices even improve as the dollar falls. It is also not directly impacted by interest rates and is a scarce asset. This behaviour makes investing in gold a popular hedging technique, acting as insurance against economic events.
- Portfolio diversification. A portfolio made up of many different types of assets generally reduces risk and is stronger against volatility. Gold is often negatively correlated to the stock market, meaning that even as the stock market falls, gold may remain steady or prices may increase. Including gold can help diversify your portfolio and provide some protection against unforeseen events.
- Stock opportunities. Stocks in gold companies can usually maintain profitability even when the gold price is low. Many companies also pay dividends, making gold stocks a valuable buy for investors.
Gold trading can take on a variety of forms: you can trade physical gold, purchase shares in gold mining companies, invest in gold ETFs, or trade in gold options and futures. Each of these methods provides different benefits and challenges and involves using different risk strategies. In this article, we’ll focus on trading in physical gold through bullion, coins, and bars.
Investing in Bullion
Gold bullion is physical gold that is at least 99.5% pure, in the form of bars or ingots. Investors can purchase bullion from banks or brokers online or in person, and store it themselves or with a third-party custodian. While you can buy the actual bars, investing in gold and silver bullion is easier to do via ETFs or futures contracts. It can sometimes even be considered legal tender.
ETFs contain a collection of securities, which typically track an underlying index. Gold bullion ETFs track gold certificates, which can be exchanged for physical gold or the cash equivalent. While it’s not the same as owning a physical gold bar, investing in gold ETFs still grants access to the bullion market.
Futures contracts are agreements to sell and deliver gold bullion to the buyer at a set date for a set price. Until this happens, the buyer only owns a paper gold contract, which can be sold before the expiry date or rolled forward into a new one. It’s worth noting that this trade is in contracts, not shares. They can be quite profitable but also lead to heavy losses if the bullion price changes unfavourably. As a result, futures trading is usually suited for experienced investors.
Options contracts are similar to futures in that the buyer and seller agree on a specific price of gold at a certain date. The difference is that with options trading the buyer doesn’t have an obligation to go through with the purchase while on the futures contract the trade will be executed.
Banks often hold gold bullion as reserves, which is used to settle an international debt or stimulate the economy through lending. A central bank lends gold bullion to a bank, which sells the gold or lends it to mining companies, while the central bank receives the cash equivalent. If the bank sells bullion on the spot market, it receives cash.
This addition of gold in the market reduces its price, hopefully enough that the bank can buy it back at a lower price than it was originally sold for. If the bank lends the bullion to a mining company, it is usually repaid from the company’s future mining output. A mining firm would borrow the gold to finance a project or in a forward hedge contract, in which gold that has not yet been mined is pre-sold to buyers.
Investing in Gold Coins
Another way to invest in gold is to buy gold coins or bars; physical forms of gold that are typically more available and more manageable for everyday use. Coins, naturally, are more flexible, since you could sell a portion of your gold collection by selling some coins rather than your entire gold bar.
Some coins may also have varying values if they are rare or antiques. Gold coins or bars can be purchased online or in person, too, through brokers, banks, or pawnshops, and stored independently. As the historical basis for most nations’ currency, gold coins can be safe investments and sold when the market price best suits the investor.
Pros and Cons of Physical Gold
Both of these methods involve owning physical gold, which has the benefit of control and the challenge of actual storage. Since investors hold the physical bar or coins, they can sell at any time the price is most attractive, and hold it when it is not. As outlined above, gold is generally considered a safe investment and a way to diversify and hedge your investment portfolio.
However, it can be difficult to store bars of gold – they take up a lot of space, and could be lost or stolen. Many brokers offer insurance options for physical gold, or it can be stored at a bank. There are some websites where you can buy, sell, and store physical gold through a broker, and thus not have the responsibility of storing it yourself.
Gold vs Bullion
When comparing the difference between investing in gold or in bullion, it is important to consider your investment needs. While investment in bullion through ETFs, Futures or Options contracts enable you to incorporate gold into your portfolio, investors, however, do not have legal title ownership of the bullion. Instead, investors simply profit from the speculative or tracked value of gold as an asset, such as through its market price or the extent of its availability on the market.
For investors looking to access the fullest extent of benefits that physical gold offers, investment in gold coins, bars or digital gold, could be considered a preferable option. In this way, investors can build their wealth, by being protected against market volatility, currency fluctuations and inflation risks, as well as being able to physically redeem their gold. Ultimately, the best investment choice will greatly depend on the investor’s goals, and the extent to which they intend to utilise their gold investment.
This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis.