Physical Gold and Silver, the Whats and Hows – Part 1

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) (5^th 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).