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Gold Bullion

Most financial experts, myself included, recommend that small private investors avoid gold bars due to the complications that can arise when the time comes to sell. Whilst we would all like to dream of having a garage or cellar full of gold bullion, the reality is very different and for smaller investors really makes no sense at all for a variety of reasons, as in reality is probably not cost effective. So, why is gold bullion not suitable? Firstly when selling gold bullion most dealers will demand to see the bars before they buy them because of counterfeiting concerns which means you would have to transport your gold to the dealer to start the selling process. Some will not buy bars without an assay, which is a chemical analysis that determines the gold’s purity. You, as the owner of the gold, will generally be expected to pay for this process as part of the sale. In most cases, gold firms will not set a price until after the bars have been delivered to their location or depository for inspection. In the same manner, bullion bars can also present problems for those wanting to trade gold for merchandise, because the individual receiving the bullion has no way of knowing whether the bars are real or not. Because of these potential trade and exchange difficulties, smaller investors are often advised to forego the dream of bullion bars for the convenience and liquidity of bullion coins. For larger investors however, gold bullion can and does play a part in the portfolio, not least because it provides a more cost effective way to purchase larger quantities at a rate closer to spot gold market prices.

Gold bullion is normally in the form of gold bars and is traded in the international marketplace as refined gold of minimum .995 ( 99.5%) fineness in 400-ounce bars conforming to the specifications of the London Bullion Market Association. Other principal bars traded on world markets are smaller and may be of higher purity, and range from .995 to .9999 fineness. Kilogram bars are favoured in Europe, the Middle East and Southeast Asia. One of the terms you may come across in your research is that of “loco” which simply means the location at  which the gold bullion is held. So Loco London simple means that the gold bullion is held in London. Now as with bullion coins, the standard unit of weight is the Troy Ounce, which derives from the French town of Troyes where this unit was first used in the middle ages, with one troy ounce equivalent to 1.0971428 ounces avoirdupois ( the word avoirdupois is derived from the middle English and French meaning goods of weight or goods sold by weight and is still used today!)

If you are a serious investor then the 400 ounce (12.4kg) “Good Delivery” gold bars held by central banks and traded by the professional bullion dealers in London, provide the most economic and efficient way to invest in gold. It is the live dealing in these 400 ounce bars, along with the trade on the Comex gold (market-approved bars in New York  of 100 ounce) that creates the spot gold price market.  Good Delivery simply means the specification which a gold bar has to meet in order to be acceptable for delivery to a market or futures exchange. In all there are more than 30 types of gold bullion bars in the world’s gold markets today, but the most heavily traded are the Good Delivery bars, bought and sold through the dealers in London. In terms of volumes, around 150,000 of these 400 ounce gold bars are produced each year. Whilst London is by far the biggest market in the world, there are of course many others. In Asia local gold markets operate in the principle regions of the Middle East, Singapore and India where the most widely traded gold bar is the ten tola bar. These weigh just 3.75 ounces and are often referred to as TT bars with approximately 2 million produced each year. In China the “five tael biscuit” weighing in at 6 ounces is the most popular size, all of which are manufactured in Hong Kong. Outside Asia and the Far East the most popular bar for private investors is the 31.25 ounce or 1000 gram bar, which are principally produced in Switzerland.

So which gold bullion bars should you buy as an investment. Well from an economic viewpoint the most cost effective ( if you can afford them ) are the 400 ounce bars. In addition, they are defined as investment gold and therefore VAT free, and also eligible for personal retirement plans. Finally, if they are Good Delivery gold bars then they will reduce your costs further as they will be accepted by the main markets with a “deliverable” status. If you are planning to buy these gold bars, then in order to retain their integrity of Good Delivery status, they must be stored and kept inside recognised gold bullion vaults, as it is this status that ensures you will receive the maximum return on your investment when you come to sell back to the market. If you are fortunate enough to own five or more 400 ounce gold bars, then you will have the option to arrange market approved storage which will still retain the Good Delivery status of each bar.

If you cannot afford these, but prefer to buy smaller size gold bars, then there are some disadvantages. Firstly, the size and cost over the gold market price are inversely correlated – in other words as the size of the bar decreases, the price you are paying per ounce over the gold market goes up. Secondly when you sell these back to the market you will be selling to one with smaller demand, so the price you receive may not reflect the current spot market. Thirdly insurance – wherever you keep them you will need insurance, both whilst in store and also in delivery. When you buy, most dealers will cover the insurance in transit as part of the purchase, but when they are returned this will be a cost to you. When stored you will need insurance, even in the bank’s vault ( which won’t be cheap ) and not insuring them is foolish in the extreme. Naturally the smaller the items then the more expensive insurance becomes on a pro-rata basis, all factors you will need to consider when deciding which bars to buy when investing in gold bullion.