Investing in gold bullion may be a great financial decision, depending on your portfolio’s goals. When you buy bullion, you also ensure the precious metals you’re getting have a certain purity rate, which makes them even more valuable.
It’s crucial to understand the difference between owning physical gold (in the traditional sense) and bullion. Getting the wrong type of precious metals will affect your investment experience.
There are many types of “bullion,” including gold, silver, and even platinum. Each of these investments will offer benefits to investors.
We want to make things easier for you, so here’s a guide on what bullion is, tips on how to invest in gold, and everything else you should keep in mind.
Definition and Importance of Bullion
Simply put, bullion is gold/silver that’s officially at least 99.5% and 99.9% pure, respectively. You can find bullion in the form of ingots or bars, most of the time.
Investors can get bullion through gold futures, gold ETFs, and other investment methods.
Bullion is often considered a legal tender since it’s held by central banks and governments.
How does “bullion” exist? It happens when a gold mining company discovers a precious metal and extracts it using chemicals or extreme heat.
The resting pure bullion is what’s considered “parted bullion.” About 20% of precious metals found by gold miners are held by central banks worldwide.
Role of Bullion in the Financial Market
Gold funds are more present in the precious metals market compared to other assets. Some of the activities related to gold stocks, ETFs, and other related categories include:
- Risk Management
Thanks to bullion, investors can enjoy price discovery, liquidity, and transparency for their precious metals, which opens the door to many opportunities.
Classification of Bullion
There are three types of bullion products:
- Cast bullion
- Minted bullion
- Extruded bullion
The three options have many benefits, so it’s a matter of personal choice.
What about the types? Here’s an overview of the most popular bullion products you can get:
It’s often considered the safest store of value. People have invested in this kind of bullion for thousands of years, and even though it doesn’t have much industrial demand anymore, it performs great in the investment market.
Silver bullion has at least 99.95% purity, and like gold, it’s often kept in ingots, bars, or coins. Unlike gold, silver has growing industrial use, which may make it a more convenient investment in some cases. Unfortunately, it may be more volatile than gold.
Other Precious Metal Bullion
With the precious metals investing, you can also get platinum bullion, which refers to bars and coins with a 99.95% purity. Even though it can be volatile like silver, it’s still a great option for diversifying your portfolio.
The Bullion Market and Its Dynamics
Role of Banks in Bullion Trade
Since central banks hold a considerable amount of mined gold, it’s safe to say they play a role in the trading market.
Even if the bank isn’t acting as an intermediary between a lender and a borrower, it can still participate in activities related to risk management, trading, hedging, and more.
Overview of the Global Bullion Market
Bullion is transacted in the bullion market. It’s an OTC market that’s open 24/7. Simply put, investors can trade gold and silver bullion. You can also invest in gold mutual funds and/or futures contracts.
The primary global market trading platform today is the London Bullion Market. Members of this association are responsible for regulating and governing the precious metals trade industry.
Most bullion banks participate in the LBMA, so they handle transactions based on its policies.
Pricing and Value of Bullion
You can expect the price of bullion to vary depending on several factors, such as the demand from companies that use gold, the general economic landscape, and other geopolitical factors.
Times of inflation, for example, tend to affect the value of bullion. When talking about gold bullion specifically, you can rest assured that it will have a better chance of avoiding depreciation.
Bullion Trading: Key Considerations
Here’s a list of things you must consider when trading bullion, whether you’re dealing with a gold ETF or a physical asset.
- Determine the value of your assets.
- Know the right time to sell your gold.
- Don’t forget about tax implications.
- Avoid potential scams.
- Find the right gold dealers for such transactions.
- Choose the right method to buy or sell your gold, whether it’s an online marketplace or a local dealer.
Investing in Bullion
Bullion is one method of gold investment, among few others.
Why Invest in Bullion?
Investing in bullion gives you a hedge against inflation, among other benefits. Even though gold’s price can still be volatile in the short term, it has proven to be an excellent investment for many.
You should invest in bullion if you want to diversify your portfolio with a low-risk asset.
Investment Methods in Bullion
When buying gold in an IRA, there are a lot of investment methods, including purchasing physical gold, investing in gold mining stocks, investing in ETFs that hold gold mining companies, etc.
Let’s cover the most important investment methods in bullion and how to make the most out of them.
Physical Bullion Investment
It refers to buying a tangible asset in the form of coins, ingots, or bars. Many consider this the best option to invest, as physical bullion holds intrinsic value, which makes it more attractive for investors.
Unfortunately, storing physical bullion comes with many challenges.
Investing Through ETFs
ETFs are often the safest and most cost-effective option to invest in bullion. First, they offer more liquidity, meaning you can buy or sell the asset within a few clicks.
However, one of the best benefits is that you don’t have to deal with storage as with physical gold. You won’t hold the bars/ingots/coins themselves, meaning you don’t have to invest in storage or insurance.
In other words, you could save more money with this method.
Futures Contracts and Bullion
Futures contracts also offer high liquidity and great prices without losing the risk hedge. When you get a futures contract, you agree to deliver or buy bullion at a certain price later. It allows you to manage your risk on a sale.
Like ETFs, you won’t hold the bullion physically, meaning you won’t have to worry about theft, insurance, or storage.
Exploring Bullion Products
As the name implies, these are coins made from precious metals. Most of the time, they’re minted in fractions of one troy ounce.
Bullion coins are often made from gold and silver.
Gold Bullion Coins
Bullion coins offer more protection against inflation and economic uncertainty in general. Even though the coin comes at a higher price point than silver, the stability it offers makes it worth your time and money.
Silver Bullion Coins
Silver bullion, on the other hand, has a more affordable price, but it’s often a more speculative investment. You won’t get the same stability that gold gives you.
To get the best results, you may want to consider investing in both types of bullion coins.
Introduction to Bullion Rounds
Bullion rounds are pieces shaped like coins. Unlike coins, however, rounds don’t have a date stamp or face value. They aren’t minted by the government as a currency either. Instead, rounds are often produced by private mints, meaning they don’t have a legal tender status.
Understanding Bullion Bars
Bars are one of the most common forms of bullion. They are a uniform block made from a precious metal, and they have a minimum purity of 99.5% in the case of gold.
Gold Bullion Bars
Gold bullion bars are safe-haven assets, so you may consider them if you’re looking to protect or diversify your portfolio.
Silver Bullion Bars
Silver bullion bars have a high demand for industrial applications, meaning that they may perform better during times of economic stability. Unfortunately, bullion bars made from silver may not perform as well as gold during times of financial turmoil.
Practical Aspects of Bullion Investment
Let’s briefly touch upon a couple of aspects that contribute to the asset value of gold.
Legal Tender and Bullion
As mentioned, bullion is often government-minted and held by central banks, so they’re considered legal tender. When something is a “legal tender,” it means it should be accepted as a form of payment for any kind of debt.
Bullion as Reserve: Central Banks and Institutions
In most cases, bullion is held as a reserve by central banks and institutional investors. Banks use said bullion to either stimulate the economy through lending or settle international debt.
Capital Gains Tax (CGT) and Gold Coins
Something crucial to keep in mind is that physical holdings in precious metals, which include bullion, are considered capital assets. More specifically, the IRS classifies precious metals as collectibles.
Regardless of the type of bullion you own, whether it’s in the form of coins or bars, these are subject to capital gains tax most of the time. You owe CGT after you sell the bullion or if you hold it for over a year.
Unlike other assets, physical holdings in silver or gold are subject to a CGT that’s equal to your marginal tax rate, up to 28% at a minimum. In other words, people in the following tax brackets will have to pay at least 28% in taxes for their sales:
Short-term gains on these metals, on the other hand, are taxed at ordinary income rates.
Keep in mind that liabilities for your sales won’t be due as soon as you make them. You must report all your bullion sales on Schedule D, Form 1040 on your tax return.
In some cases, you may also have to submit Form 1099-B at the time of sale. Not all precious metals apply to this scenario, though.
What about coins? In some cases, coins used as legal tender in the U.S., aren’t considered collectibles by the IRS. The “American Eagle,” for example, may be exempt from taxation. This only applies to coins that are in a bank’s ownership, although authorized non-bank trustees may also be eligible.
Bullion Storage and Security Considerations
If you buy physical bullion, you must store it accordingly to avoid security risks. Most people opt for storing precious metals at home or safe deposit boxes.
However, if you want the best option, go for a professional storage facility. You’ll have to pay a fee for storing your bullion, but you’ll get more protection against theft, loss, or damage.
Frequently Asked Questions
What’s the Difference Between Gold Bullion and Gold?
Bullion refers to gold that you can buy/sell for investment purposes. Gold itself is a coveted yellow metal that people use for different purposes. An example of this is gold jewelry.
In other words, not all forms of regular gold are used for investments.
What Is the Cheapest Way to Buy Gold?
You could buy gold bullion or pre-owned gold. Another cost-effective option is to invest in an Exchange-Traded Fund (ETF). In these cases, you don’t own the physical gold, so you avoid certain fees and risks.
Is Gold Bullion a Good Investment?
The potential of gold as an investment is great, especially if you’re looking for a hedge against inflation and portfolio diversification.
What Is the Difference Between Bullion and Coins?
Bullion is meant to be used as an investment. Keep in mind you can get bullion in different forms, including gold bars, coins, etc.
When you own regular gold bars or coins without a specific purity rate, these aren’t necessarily meant to be used for investments.
What Is the Difference Between Bullion Coins and Numismatic Coins?
Numismatic coins are created for the purpose of collecting, whereas bullion coins are meant to be used in the investment industry.
Should I Buy Gold Bullion or Gold-Associated Products?
It depends on what your goals are. If your goal is to invest, you should get bullion. On the contrary, if you’re only interested in owning gold, you may be better off with gold-associated products.
Considering bullion for your gold investments ensures that you get precious metals meant for investment portfolios. Now that you understand what physical gold bullion entails, you’re ready to make better decisions for your financial future.
When you invest in gold, silver, or other precious metals, you can get many benefits like portfolio diversification, inflation hedge, and more. Remember to seek help from a professional if you don’t know where to start your investment journey.