What Is Bullion? A Guide to Gold and Silver Bullion

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Bullion is gold or silver refined to a very high purity and valued mainly for its metal content. Gold bullion is generally defined as at least 99.5% pure, and silver bullion as at least 99.9% pure. It usually takes the form of bars or ingots, and some bullion coins are also issued as legal tender. Central banks hold it as a reserve asset, bullion banks trade and lend it, and individual investors buy it directly or gain exposure through exchange-traded funds (ETFs) and futures.

What Counts as Bullion

The word “bullion” describes metal in its investment form. A gold bar stamped “999.9” contains 99.99% gold. That fineness, multiplied by the bar’s weight, determines what the bar is worth. Craftsmanship, collector demand and brand matter far less than they do with jewelry or rare coins.

Precious metals are weighed in troy ounces. One troy ounce is about 31.1 grams, roughly 10% heavier than the ordinary (avoirdupois) ounce used for food. Prices quoted for gold and silver are per troy ounce unless stated otherwise.

Bullion comes in three main forms:

• Large wholesale bars. The LBMA’s Good Delivery standard covers bars that move between banks and vaults: roughly 400 troy ounces at 99.5% minimum fineness for gold, and roughly 1,000 troy ounces at 99.9% for silver.
• Retail bars and ingots. Refiners produce smaller bars, from a gram to a kilogram and beyond, for private buyers.
• Bullion coins. Government mints issue legal-tender coins whose market value follows the metal price and far exceeds face value. Some fall below 99.5% purity: the American Gold Eagle and the South African Krugerrand are 22-karat (about 91.67% gold) alloys containing one full troy ounce of gold. Buyers still treat them as bullion because they are priced on gold content.

Bullion differs from numismatic coins, which are priced on rarity, condition and collector demand. A numismatic coin can trade far above its melt value. A bullion coin generally trades close to it, plus a dealer premium.

Who Holds Bullion and Why

Precious metals once anchored the monetary system. Under the gold standard, currencies were convertible into a fixed amount of gold. The U.S. dollar’s link to gold effectively ended in August 1971, when President Nixon closed the “gold window” and stopped converting dollars held by foreign governments into gold. Major currencies have since been fiat money, but gold has remained on central bank balance sheets.

Central banks keep bullion as a reserve asset that does not depend on another government’s promise to pay. They have used it to settle international obligations and can lend it to earn a return. Pension funds and asset managers hold gold to diversify portfolios and protect against inflation.

Bullion banks sit between central banks, miners, refiners, fabricators and investors. They clear transactions, manage and hedge price risk, trade, vault metal and connect lenders with borrowers. Many belong to the LBMA, the trade association for the London OTC gold and silver market, whose market makers quote buy and sell prices to other participants. Market makers have included HSBC, JP Morgan, UBS, Goldman Sachs and Standard Chartered.

How the Bullion Market Works

Most wholesale bullion trades over the counter, with no single exchange floor. Banks and dealers deal directly and settle electronically or by phone. Because trading moves through London, Zurich, New York, Shanghai and Tokyo, the market runs 24 hours a day on business days. Futures exchanges also matter for price discovery and hedging.

The spot price is the price for immediate delivery. Retail prices for bars and coins are quoted relative to spot. Dealers add a premium when they sell and pay somewhat less than spot when they buy back.

Gold prices respond to supply from mining and recycling and to several sources of demand:

• jewelry and industrial or technology uses
• investment demand from individuals and funds
• buying and selling by central banks

Silver has a larger industrial component, so its demand depends more on manufacturing activity. Investors treat both metals as safe havens, with gold drawing the greater share.

Bullion Lending, Swaps and Leasing

Gold sitting in a vault earns nothing, so central banks have developed ways to generate income or liquidity from their reserves:

• Gold swap: a central bank exchanges gold for cash and agrees to reverse the trade at a set later date. It works much like a secured loan, with gold as collateral.
• Gold deposit or loan: the central bank lends gold to a counterparty, usually a bullion bank. The counterparty returns the metal later and pays interest in gold or currency.

The return on lent gold is the lease rate (or deposit rate). The market once also tracked the Gold Forward Offered Rate (GOFO), the rate at which LBMA market makers lent gold on swap against U.S. dollars, but GOFO is no longer published as an LBMA benchmark.

Bullion banks often use borrowed metal to finance miners. If a miner has pre-sold future production through a forward contract and buyers want physical delivery early, the miner can borrow gold from a bullion bank, deliver it, and repay the loan with metal as it is mined.

Bullion as an Inflation Hedge

Inflation reduces the real value of returns fixed in currency terms: real return ≈ nominal return − inflation rate. A hypothetical bond paying 4% in a year when prices rise 2% grows purchasing power by only about 2%. Because commodity prices often rise in inflationary periods and gold and silver are priced in currency, investors hold bullion to offset some of that erosion.

The hedge has limits. Bullion pays no interest or dividends, and its price can fall even while inflation is running. When interest rates rise, interest-bearing assets become more attractive compared with a metal that yields nothing. Gold’s reputation rests on long periods and on episodes of economic stress, not on a reliable year-by-year match with consumer prices.

Ways to Invest in Gold and Silver Bullion

Physical Bars and Coins

Buying bars or coins from a reputable dealer gives you direct ownership. In a hypothetical example, with gold spot at $2,000 per troy ounce and a 4% dealer premium, a one-ounce coin costs $2,080. If the dealer later bought it back at spot, gold would need to rise about 4% just to recover the premium. Premiums vary by product, size, dealer and market conditions, and smaller items generally cost more per ounce than larger bars.

Storage: Allocated vs. Unallocated

Physical bullion can sit in a home safe, a bank safe deposit box or a third-party depository. Professional vaults offer two main account types:

• Allocated accounts hold specific, identified bars or coins that belong to the client. If the custodian goes bankrupt, its creditors have no claim on that metal, because it is the client’s property.
• Unallocated accounts give the client a claim on a quantity of metal from the provider’s general holdings. They are usually cheaper, but the client is effectively an unsecured creditor of the provider.

Bullion ETFs

Precious-metals ETFs trade on stock exchanges and can be held in a standard brokerage account or an IRA. Some hold vaulted physical bullion, with each share representing a fraction of it. Others use futures or other structures, which can make returns diverge from spot. The prospectus states what a fund holds. Investors avoid their own storage and insurance but pay an annual expense ratio, and in most cases cannot take delivery.

Futures Contracts

A bullion futures contract is an agreement to buy or sell a set quantity of metal at a preset price on a future date. The standard COMEX gold contract, for example, covers 100 troy ounces. In physically settled contracts, the seller may have to deliver at or before expiry, and until then the buyer holds a contract, not metal. Buyers who do not want bars can sell or roll the contract before expiry. Futures trade on margin, so small price moves produce large gains or losses relative to the cash put up. That leverage suits hedgers and active traders more than buy-and-hold savers.

Costs and Risks to Weigh

Each route trades one set of costs for another:

1. Physical metal: dealer premiums, buy-sell spreads, storage and insurance, plus the effort of verifying authenticity when you sell.
2. ETFs: ongoing expense ratios and, for non-physical funds, tracking differences from spot.
3. Futures: margin calls, roll costs and the risk of losses larger than the initial deposit.

All three carry price risk, and bullion can fall for extended periods. Tax treatment also differs by jurisdiction and product, so selling bars, coins, ETF shares or futures may produce different after-tax results.

FAQs

The Bottom Line

Bullion suits investors who want an asset that holds value without relying on any issuer's promise to pay, but it pays no income and can fall for extended periods. Physical bars and coins give direct ownership at the cost of premiums and storage, ETFs offer convenience for an annual fee, and leveraged futures fit hedgers and active traders better than buy-and-hold savers.