Holding physical gold and silver in the
form of bullion is one of the recommended ways of having the commodities asset
class in The Bedokian Portfolio. I had mentioned briefly in the ebook1 on
what to look out for in getting physical gold and silver, and in this blog post
I will elaborate a bit more on the whats and hows of physical gold and silver.
Shapes and Weights
Gold and silver bullion comes in two main
shapes; round (called coins) and rectangular (called bars). They are available
in different sizes via weights ranging from one gram (g) to one kilogram (kg),
or in troy ounces (oz), where 1 oz is about 0.0311 kg. Gold and silver prices
in the financial markets are quoted on a per oz basis.
Spread Within the Spread
The next aspect will be the spread, or
rather the price spread, of the physical gold and silver. You cannot buy a gold
or silver bar or coin at the current price (or spot price) quoted in the
markets; you would have to fork out a slightly higher price over the spot ask
price to buy the physical, and you would have to sell it off at a price lower
than the spot bid price. The difference between the spot price and the physical
buy/sell price is known as the physical-spot spread, and the whole spectrum is
what I call the “spread within the spread”.
To put it graphically, here it is:
The main reason
for this mark-up (and mark-down) is that bullion, like physical goods, incurs
fees and charges such as transportation, labour, storage, etc, so these costs
are passed on to the investors.
Weights, Spreads
and Spot
As an investor,
ideally it is good to buy bullion that has a small physical-spot bid and ask
spreads, so that you can get as close to spot pricing. Although there are many
weights available for bullion, not all have the same proportion of
physical-spot spreads, and also these spreads tend to change from time to time.
For example a 10 g gold bar may have a 10% markup over the spot price, but for
a 1 oz this markup may only be at 8% or so.
Also, different
dealers charge the bullion and spreads differently, though not by a big
difference (unless we are talking about collectible coins and bars, which I
will leave it to the next part).
And not
forgetting, spot prices, like all financial goods, do change from time to time
as well, so the price that you see on a dealer’s online site may change by the
time you go down to the place to buy or sell.
Mints, Refineries
and the London Bullion Market Association
Before I end off
this part, I will touch on mints, refineries and the London Bullion Market
Association (LBMA). Mints are facilities where coins are manufactured. Besides
coins for currency circulation, mints also produce bullion coins. Refineries
are like mints, but they tend to produce bullion bars. The terms mints and
refineries are sometimes interchanged, since some mints produce both bullion
coins and bars (e.g. Royal Canadian Mint2).
LBMA is an
international trade association which represents the London market for gold and
silver bullion.3 It maintains
the LBMA Good Delivery List, a stringent standard on the quality of gold and
silver bars, and this standard is adopted by other bullion markets all over the
world. Mints and refineries that are under this Good Delivery List signify that
they had passed the benchmark set by LBMA, which means their bullion bars and
coins have met the standard and good for investment purposes. The LBMA is used
by the Inland Revenue Authority of Singapore as one of the criteria for the
exemption of the Goods and Services Tax on bullion bars and coins.4
1 – The Bedokian Portfolio, p39-42.
2 – Royal Canadian Mint. About the Mint.
Our Products. http://www.mint.ca/store/mint/about-the-mint/our-products-1200028#.WKF_Dhid7sE
(accessed 13 Feb 2017).
3 – London Bullion Market Association. LBMA
– The Competent Authority for the world Bullion Market. http://www.lbma.org.uk/about-us
(accessed 13 Feb 2017).
4 – Inland Revenue Authority of Singapore.
IRAS e-Tax Guide. GST:Guide on Exemption of Investment Precious Metals (IPM) (5th
ed). 4.2(b)(i). 1 Sep 2016. https://www.iras.gov.sg/irashome/uploadedFiles/IRASHome/e-Tax_Guides/etaxguide_GST_GST%20Exemption%20of%20Investment%20Precious%20Metals.pdf
(accessed 13 Feb 2017).
