Introduction to Bullion: Pure Gold and Silver Reserves

Introduction to Bullion: Pure Gold and Silver Reserves

4 Min.

Bullion refers to pure gold and silver that is often shaped into bars or coins. It is commonly used as reserves by banks, and investors can buy or sell bullion through dealers or by using ETFs or futures contracts.


Bullion is highly pure gold and silver, with a minimum purity of 99.5% and 99.9%, typically in the form of bars or ingots. It is often held as a reserve asset by governments and central banks. To create bullion, gold must be discovered and extracted from gold ore, which is a mixture of gold and mineralized rock. This process involves the use of chemicals or extreme heat, resulting in pure bullion, sometimes referred to as "parted bullion," while bullion containing multiple metals is known as "unparted bullion.”

Legal Tender

Bullion is sometimes considered legal tender and is primarily held by central banks or used by institutional investors to hedge against inflation. About 20% of mined gold worldwide is held by central banks in bullion reserves. These reserves serve purposes like settling international debt and stimulating the economy through gold lending, where central banks lend gold to bullion banks at around a 1% interest rate to raise funds.

Central Bank Reserves

Bullion banks engage in various activities within precious metals markets, including clearing, risk management, hedging, trading, vaulting, and facilitating transactions between lenders and borrowers. Most bullion banks are members of the London Bullion Market Association (LBMA), an over-the-counter (OTC) market known for its limited transparency. OTC markets are dealer networks for various financial products, commodities, and securities that do not trade on centralized exchanges.

The twelve LBMA market makers include banks like:

  1. UBS
  2. Goldman Sachs
  3. Citibank
  4. Standard Chartered Bank
  5. Credit Suisse
  6. Merrill Lynch
  7. BNP Paribas
  8. JP Morgan Chase
  9. ICBC Standard Bank
  10. Morgan Stanley
  11. TD Bank
  12. HSBC

Bullion Lending and Financing

Central banks lend gold to bullion banks for specified periods, typically three months, receiving cash equivalent to the lent gold. They then offer this money on the market at a lease rate called Gold Forward Offered Rates (GOFO), published daily by the LBMA. A higher lease rate encourages central banks to lend gold. Bullion banks, in turn, can sell the borrowed gold or lend it to mining companies.

If sold on the spot market, the bullion bank receives cash based on prevailing market rates. Increased gold supply lowers prices. The bank hopes that when repurchasing gold, the price will be lower, resulting in cost savings. At the loan period's end, the bank buys back and returns the gold to the central bank.

Bullion banks lend gold to mining firms for project financing or fulfilling forward hedge contracts, where pre-sold, yet-to-be-mined gold is delivered to buyers. Gold lent to mining companies is typically repaid from their future mining output.

Bullion Trading and Investment Market

Bullion is traded in global markets, mainly through 24-hour OTC trading. London, New York, Tokyo, and Zurich are key bullion market locations. The price of gold bullion is influenced by jewelry demand and economic conditions, making it a popular investment during economic instability.

Both gold and silver bullion serve as safe-haven investments, leading to price increases during geopolitical events and financial crises. Bullion is also used to hedge portfolios against inflation, as rising prices can erode investment returns.

Ways to Invest in Bullion

Investing in bullion comes with price fluctuations and potential risks. Here are three common ways to invest in bullion:

  1. Physical Bullion: Investors can buy gold or silver bars and coins from reputable dealers. These can be stored in a safe deposit box at home, a bank, or a third-party depository. Alternatively, bullion can be held in an allocated account at a bank, providing legal ownership security.
  2. Exchange-Traded Funds: While not equivalent to owning physical bullion, investors can access the bullion market through ETFs. Gold or Silver ETFs hold certificates, not physical bullion. These certificates can be exchanged for physical bullion or cash at a bullion bank. ETFs are easy to trade through brokerage accounts, with low fees, making them a convenient option for many investors.
  3. Futures Contracts: Bullion futures contracts allow investors to agree on buying or selling bullion at a set price on a future date. Buyers commit to taking delivery of the gold or silver at contract expiration. Alternatively, contracts can be sold or rolled forward. Futures involve significant notional amounts and are suited for experienced investors, often requiring margin trading.

Remember, bullion investments can yield profits or losses, so it's essential to understand the risks and choose the right investment option based on your experience and financial situation.


Bullion, consisting of pure gold and silver, is widely used as a reserve asset by central banks and offers investment opportunities for individuals. Whether through physical ownership, ETFs, or futures contracts, investors can participate in the global bullion market. However, it's crucial to consider the price fluctuations and risks associated with bullion investments. Understanding the market dynamics and making informed decisions based on individual financial goals and risk tolerance is key to successful bullion investment.

Bullion Coins
Bullion Market
Exchange-Traded Fund (ETF)
Over-The-Counter (OTC)
London Bullion Market Association (LBMA)
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