12
Jun
2009

What is Bullion?

Bullion is simply high grade, almost pure gold, silver and platinum in mass in the form of coins and bars. We often hear from first-time gold buyers: “I want to buy gold, but I don’t want to pay the expense of buying gold coins. How do I buy just plain gold bullion?”

This is a misunderstanding of what gold bullion is. The common perception is that gold bars are the most cost effective, and perhaps the only available form of gold bullion. The same thinking has it that coins are not really gold bullion. There’s a common misconception that all coins are limited in supply, expensive, and indeed collectors’ items.

Bullion is a recognised weight and fineness of precious metal that you can purchase for the current spot price of the metal, plus the small percentage costs incurred in refining, fabricating, and shipping that bullion to you. Bullion is simply a refined and stamped weight of precious metal in mass form.

Bullion Bars

When most of us think of gold bullion, we think of the large gold ‘bricks’ that we presume are stored in Fort Knox. Such large gold bullion bars are familiar to us from movies like “Three Kings ” and “Goldfinger”. Bars like these make up most of the world’s gold bullion, and are meant to be held by governments and central banks. These are the “London good delivery” gold bullion bars of approximately 400 troy ounce size, refined and cast by the various private refiners worldwide, and accepted for ‘delivery’ into London and other major gold bullion markets.

These large bars are an efficient way to buy physical gold, particularly if you are going to store your larger gold bullion holding in a recognized insured precious metals storage facility. Also, if you have a working use for the gold, such as in electronics, manufacturing or the arts, these large gold bullion bars are the most cost-efficient way to buy it.

Smaller bars of gold bullion in sizes from the tiny 1-gram jewelry trinkets up to 32.15 ounce kilogram bars have also been poured by various refiners around the world. These are very popular in the retail gold bullion market worldwide, particularly in parts of Europe, the Middle East, India and increasingly China. Buying gold bullion in bar form gives people around the world a way to build wealth without depending on the changing value and acceptance of the local currency. For people everywhere in the world, a privately held gold bullion hoard is a hedge against many possible contingencies.

Bullion Coins

Throughout the world, bullion coins backed and guaranteed by their issuing government are the most popular forms of bullion traded. Gold and silver coins have been used in trade for thousands of years. The ancient kingdom of Lydia in Asia Minor is the first recorded western society, in the 7th and 6th centuries BC, to use gold coins as standard coinage. Their last King was Croesus who was famed for his vast wealth.

Money is simply an agreed upon means of exchange. The concept of a government guaranteed measure of gold bullion was what originally gave ‘money’, it’s power and legitimacy and this has continued throughout history. Until 1933 when gold lost its link with everyday currency when Roosevelt abandoned the Gold Standard and banned the private ownership of gold. The Gold Standard stipulated that money could only be printed provided there were the gold reserves to back the newly printed paper money. Gradually people began to think of gold and silver coins as collectible artifacts from our monetary past. Gold coins, no longer produced as money, lost their link with their gold bullion value, and came to be considered something scarce and obsolete.

All that changed in 1967 with the introduction of the gold Krugerrand. That year, South Africa introduced a radical idea in gold bullion: Government-issued gold bullion in convenient one ounce form, “gold coins for the people”, struck in unlimited quantities and distributed at the current spot price of gold plus a small percentage. Their status as government-issued legal tender coins of a nominal face value avoided the restrictions, duties, and taxes that many countries levy on raw gold bullion. Now, these gold bullion coins have come to dominate the world gold market, mostly in the form of gold bullion coins containing exactly one troy ounce (31.15 grams) of pure gold. South Africa pioneered the ’round bullion’ concept, soon followed by Canadian Maples, Chinese Pandas, and in 1986, U.S. gold Eagles. Since then, countries such as Australia, Austria, Great Britain, and Singapore have also issued such coins, with varying degrees of success. But each coin meets the basic requirements for gold bullion: guaranteed purity, exact weight, and total liquidity worldwide.

If you want to take personal possession of your gold bullion, your best bet is the guaranteed gold bullion coins issued by the various world mints. In the U.S., American gold Eagles are probably your best choice, although Canadian Maple Leafs, South African Krugerrands, Chinese Pandas, and Australia’s bullion coins each have much to recommend them. Larger gold bullion bars are available, but their purchase is most practical only when the intention is to leave your gold bullion in a qualified precious metals depository.

Precious Metal Storage

For our clients who make larger (€100,000 and more) purchases and do not wish to take personal possession of their gold bullion, placing their holdings in a qualified precious metal depository is often a practical way to safeguard their gold bullion.

Some advantages of precious metals storage facilities include: The client doesn’t actually have to take physical possession of the gold bullion and personally convey it to secure storage. By opening an account at a storage facility, the client lets the facility take care of receiving and storing the material. Larger gold bullion bars (chiefly 32.15 kilogram bars and delivery bars of approximately 400 ounces) can be bought and sold without assay. Most storage facilities will, for a fee, ship via bonded carrier such as Brinks, or via US Mail as directed by the client, sparing you the effort and risk of transporting the gold personally.

However, there are disadvantages to precious metals depositories: Someone else has your gold! This negates one of gold’s great assets: its value in and of itself, not as a representation, a credit or a debit. Sometimes a printed statement from a depository is a poor substitute for hard, yellow metal in your hand. Storage facilities typically charge ¾% – 1½% yearly storage and insurance fees. And as the value of the items stored goes up, so do those fees. Opening an account at a bonded storage facility involves connecting your identity to your gold bullion ownership, which for many people defeats their desire to maintain confidentiality about their gold holdings.

Conclusion

If you are going to store gold at a bonded precious metals depository, for gold purchases of €200,000 and greater, large gold bullion bars are your most cost-effective vehicle. By leaving them in a registered storage facility, you avoid the need for re-assay of the bar(s) upon resale.

If you are going to take personal possession of your gold you are better off with the universal liquidity, divisibility, and convenience afforded by pre-1933 European and World gold coins and or 1-ounce bullion gold coins. They can be resold virtually anywhere, and they do not require re-assaying upon sale.

Gold bullion coins in the last twenty years have become the most liquid, divisible, and accepted form of gold bullion worldwide. They trade on an everyday basis, and upon resale allow you to avoid the fees, delays, assays, and discounts involved in liquidating larger gold bullion bars. The guaranteed gold bullion coins, certified products from the various government mints, are probably the smartest and safest way to buy gold bullion if you are going to take physical possession yourself.

Mark OByrne