Bullion Markets (An Introduction)

Gold as an investment

Gold was in use as a form of money, in one form or another, at least from 560 BC until the end of the Bretton Woods system in 1971. It was used as a store of value both by individuals and countries for much of that period. Since the end of the Bretton Woods system in 1971, gold has largely lost its role as a form of currency. It is still considered by many as a store of value and a safe haven in times of crisis. Central banks retain large gold reserves.

Gold as a financial asset

Gold and other precious metals are assets that are both tangible and liquid (i.e. easily traded), unlike real estate which is tangible but not liquid, or company shares and bonds which are liquid but not tangible. Considering its high density and high value per unit mass, storing and transporting gold is very easy. Gold also does not corrode. Historically, it was also very easy to verify that an offered coin had the density of gold through the use of Archimedes' principle. Today, however, some metals are denser than gold yet cheaper. While some think gold deserves special treatment based on its cultural value and use as money, others consider gold a commodity, like copper or lead.

Buying physical gold

Some people, sometimes referred to as gold bugs, buy gold which they retain in their physical possession in the belief that should the monetary and financial system collapse, gold would still be considered valuable. Other reasons for doing so include the ease of hiding the gold from others, such as family members or tax authorities.

Buying gold for the gold price

Some people buy gold not in their physical possession, but stored for them by a bank, through a gold exchange-traded fund, or in the form of a gold certificate; their motivations also apply to those who hold gold physically. Some asset allocation strategies use exposure to gold as a form of diversification, though the inclusion of gold in portfolios has largely been abandoned since the 1980s. Gold may be included in portfolios as an insurance against unforeseen calamities which may affect the price of other investments negatively.

Gold is sometimes treated as the fifth world currency, along with the US dollar, euro, Japanese yen, and the British pound. It is therefore bought in a process analogous to currency speculation: when it is expected that the dollar will soon decline against other currencies, for an investor who receives his salary in dollars, buying gold or other currency before the decline and selling it afterwards could realize a profit. Additionally speculators attempt to make a profit by predicting the gold price, detecting market trends they believe will show them the future price direction. For centuries gold has remained a store of value. Some people believe that by buying gold, they will be most likely to maintain their wealth in the long term, protecting them against inflation and decline in the value of fiat money. These individuals believe that certain events (e.g. war or economic crisis), may have a negative influence on the value of their other investments, but the opposite effect on the value of gold.