Traders and experts often discuss gold and the commodities market. However, the specific terms “gold” and “bullion” are actually quite different.
Gold encompasses all forms of the precious metal and ways to trade in its market, including coins and bars. Bullion, on the other hand, includes the physical forms of other precious metals also traded, such as silver and platinum.
In this article, we’ll focus on trading in physical gold through bullion, coins, and bars. We’ll cover:
- What’s the price of gold? How the gold market has performed recently
- What’s the best way to buy gold? Four different options open to you
- What is gold bullion?
- How to buy gold bullion
- Investing in bullion
- Investing in gold coins
- The pros and cons of owning gold
- Frequently asked questions about bullion gold
- Weighing up the right option for you
Discussing the gold market
Trading in the commodity market includes buying and selling precious metals like gold, silver, and platinum. Investors have valued gold throughout much of recorded history and many societies have used it as currency.
Until the 2008 financial crisis, its price remained steady for many years. When the crisis hit, its price nearly doubled.
In 2019, the price of gold increased by 18.83% while in 2020 it went up by an incredible 24.43%. By contrast, 2021 and 2022 were slower years for gold with falls of 3.51% and 0.23% respectively.
This is due in part to the Federal Reserve. They announced that banks would increase interest rates sooner than expected causing the decline.
How is gold traded?
Gold trading can take on a variety of forms. You can trade:
- Physical gold (such as investing in gold bars)
- Purchase shares in gold mining companies
- Trade in gold options and futures
- Invest in gold ETFs (Exchange-Traded Funds)
Each of these methods provides different benefits and challenges and involves using different risk strategies.
Why do people buy gold for investments?
There are many reasons to invest in gold. One of the main reasons people buy gold for investments is that it is often viewed as a safe option when compared with other investments. It often happens that when the value of other asset classes like the FTSE 100 goes down, the price of gold often goes up.
Here are some of the reasons gold can be a choice investment:
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.
Generally, gold maintains its value. Its price may improve when the price of the dollar goes down. Unlike other investments, gold is also not directly impacted by interest rates and is a scarce asset.
Thanks to this, investing in gold is a popular hedging technique. Essentially, investing in gold is often seen as a means of insurance against economic events that may affect the value of other investments.
3. 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. This means that, even as the stock market falls, gold often either remains steady or enjoys a price increase.
Including gold can help diversify your portfolio. This provides you with some protection against unforeseen events.
4. 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.
What does bullion mean?
Bullion gold is physical gold, usually in the form of real gold bars, gold ingots, or gold coins.
Countries mint bullion gold to metric karat standard either to 22 karat or 24 karat. 22-karat gold is 91% pure gold and 24-karat is 99.9%. Whereas karat refers to the purity of gold, bullion refers to gold that people buy and sell for investment purposes.
Because of this, bullion gold doesn’t have to be 24 karats. For example, the American Gold Eagle coin, a popular form of bullion, is 22-karat gold. However, a piece of gold can be both 24k and bullion if it’s pure and primarily used for investment purposes.
Where to buy gold bullion
You can buy gold bars from a bank, an online broker, or in person. However, when thinking about how to buy bullion gold for your portfolio, make sure you:
- Pick a reputable dealer
- Understand the type of bullion you wish to buy (for example, a gold bullion bar, ingot, or coin)
- Have its weight and purity verified
- Find somewhere safe to store it
- Insure it
Investing in bullion
When choosing how to buy bullion gold or bullion silver, you should consider buying via gold ETFs or futures contracts. These are easy to arrange and many banks and financial institutions consider these investments as legal tender.
ETFs, whether they’re digital ETFs or physical ETFs, contain a collection of securities, which typically track an underlying index. Gold bullion ETFs track gold certificates and you can exchange them for physical gold or their 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.
They can sell this before the expiry date or roll it forward into a new one. It’s worth noting that this trade is in contracts, not shares.
They can be quite a profitable way to invest in gold. However, you should be careful with them as if the bullion prices changes for the worse, so too will your ETFs. As a result, futures trading is usually suited for experienced investors.
Options contracts resemble 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. However, on futures contracts, they have to execute the trade.
Banks often hold gold bullion as reserves. They use gold bullion bars for purposes such as settling international debts, or stimulating the economy through lending.
To do this, the central bank lends gold bullion to a bank. The bank then sells the gold or lends it to mining companies. The central bank then receives the cash equivalent. If the bank sells bullion on the spot market, it receives cash for the sale.
This addition of gold into the market reduces its price. The bank then hopes it can buy it back at a lower price than it sold it for. If the bank lends the bullion to a mining company, it is usually repaid from the company’s future mining output.
The mining firm borrows the gold to finance a project or as a forward hedge. In essence, this is gold that it has not yet mined that it pre-sells to buyers.
Investing in gold coins
Naturally, coins are more flexible as investments and are easier to sell. For example, you could sell part of your gold collection by offloading a few coins, rather than have to go through the effort of attempting the sale of an entire gold bar.
Some coins may also have varying values if they are rare or antiques. You can buy gold coins or bars online or in person, too. The Kinesis Bullion store offers a range of bullion coins and bars to customers based in the US. You can also get them stored independently.
Until recently, nations based their currency values on gold. That’s why many consider them safe investments, selling part or all of their portfolio when the market price suits them.
Pros and cons of owning physical gold
Buying gold bars, ingots, and coins involves owning physical gold. That has the upside of control but the downside of finding somewhere to store it.
When you have physical possession of gold bars, ingots, and coins, you can sell them when the price is attractive. Or, you can hold onto them when the price has taken a dip.
As aforementioned, gold is generally considered a safe investment. It’s a way to diversify and hedge your investment portfolio.
Storing bars of gold is difficult though. They take up a lot of space and there’s always the chance that someone could steal them. Many brokers do offer insurance options for physical gold.
There are specialised websites dedicated to buying, selling, and storing physical gold through a broker. That way, you don’t have the responsibility of storing it yourself.
Frequently asked questions on gold and bullion
How to buy gold on the stock market
You don’t purchase physical gold via the stock market. Instead, you can buy shares of gold-related financial instruments like:
- Gold ETFs
- Gold Mining Stocks
- Gold Mutual Funds
- Gold Futures and Options
To take any of these courses of action, you’ll need to open a brokerage account. You’ll then need to fund your account and place an order with your broker.
Paper gold vs physical gold: How to choose
Paper gold is gold exchange-traded funds, mutual funds, or futures. Physical gold is bullion coins or bars.
Choosing which you invest in depends on your goals, personal preferences, and risk tolerance. Factors to consider include:
- Liquidity: You can buy or sell paper gold quicker than physical gold without affecting the price. Physical gold, in large amounts, takes longer to buy and sell and often costs more.
- Storage and insurance: You need to secure physical gold and insure it, which adds to the cost. Paper gold normally requires neither.
- Verification of purity: You need someone qualified to check the purity and authenticity of physical gold. You don’t have this concern with paper gold.
- Possession: For some investors, owning physical gold gives them a sense of security. With paper gold, you just have a claim or exposure to it, you never own it.
- Price: Paper gold normally follows the spot price of gold closely. Depending on market conditions, you may get more or less than the spot price with physical gold.
- Risk appetite: Physical gold, unlike paper gold, has no counterparty risk. Counterparty risk is the risk that the other party may default. An ETF or mutual fund is an example of a counterparty.
Gold vs stock market: How to choose
Investing in the stock market means owning a piece of a company and having potential voting rights in that company. Investing in gold means owning a physical asset that holds intrinsic value.
When choosing what’s right for you, consider:
- Risk appetite: In the past, stocks provided a higher long-term return than gold but are subject to short-term volatility. Gold’s return can be quite modest during stable economic times but can act as a safe haven and inflation hedge.
- Diversification: You may wish to invest in both. When stock prices fall, the gold price often increases and vice versa. This can protect your portfolio from big swings in either direction.
- Liquidity: Stocks, paper gold, and physical gold are all liquid meaning that they’re easy to buy and sell. Larger amounts of physical gold may take longer and cost more to sell.
- Income: Stocks pay dividends meaning you get an income stream. Gold does not. Kinesis does however offer investors a passive yield on every single gram of gold and silver held with us.
- Time: Over the longer term, stock markets, despite their volatility, can deliver high returns. Gold can be better for shorter time horizons and as a hedge against short-term market volatility.
How much is gold bullion worth?
The spot price of gold affects actual gold bar bullion prices. The spot rate changes throughout the day which affects market prices. The weight and purity of your gold are factors as is its form (whether it’s bars or coins).
To work out the current price of gold bullion you hold, multiply the weight of the gold (in ounces) by the current spot price of gold.
However, you may not get the very best gold bullion prices when you sell. Dealers pay less for gold to cover the costs and make a profit. You may also pay more for gold when buying for the same reasons.
Certain gold coins may be more collectible meaning that their value is higher than the spot price multiplied by their weight.
Gold vs Bullion: Weighing up what’s right for you
When comparing investing in gold or investing in bullion, consider your needs first.
If you invest in gold bullion via ETFs, futures, or options, you don’t have legal title ownership of the bullion. Instead, you profit from the speculative or tracked value of gold as an asset.
You make or lose money on its market price and the extent of its availability on the market.
For investors who want to buy gold bullion, investment in gold coins, bars, or gold-backed digital assets, might be the preferable option. You protect yourself against market volatility, currency fluctuations, and inflation risks. You build your wealth and you can physically redeem your gold.
In the end, what’s right for you depends on your investment goals. You also need to consider the extent to which you intend to utilize your gold investment. However you decide to invest, consider buying gold with Kinesis.
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.