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Understanding Bullion Pricing

This is an international market and as with other commodities, all precious metals are traded in US dollars, regardless of where you buy them.

Spot Pricing

Spot prices are those quoted in the actual ‘over the counter (OTC)market’ in bullion upon which everything else is based. It is a worldwide 24-hour market with trading taking place in every major time zone, although the primary marketplace is London.

To be a player in the bullion market you need to be a company registered with the London Bullion Market Association (LBMA). These specialist dealers have agreed to abide by a set of rules which dictate the terms under which they will pay for and take collection of the bullion concerned, if actual physical possession is to be taken.

In practice very little precious metal actually moves because the dealers are trading in ‘unallocated’ gold or other metals, so there are no specific bars involved. The payment terms are 48 hours.

Individual investors cannot participate in this market: banks may offer to trade on their behalf but fees and upfront payments will be required. Few banks are members of the LBMA, so they will act through intermediaries.  

It is simpler to select a reputable bullion dealer that will sell at near-market bullion prices with only a low commission, and will buy back at terms of maybe 2% to 2.5% below market rate. Do bear in mind that although they are linked to official spot rates and tend to move in parallel with them, market prices for small bars and coins tend to be higher than official spot rates because dealers are trading large bars that are cheaper to make and store.

A key point in favour of buying and holding physical bullion is that you are an ‘allocated’ investor. You have what you hold. At the end of 2008 it was estimated that there was 15,000 tonnes of unallocated gold in the world and the LBMA was trading 2,134 tonnes daily on a spot basis. It is almost certain that dealers are operating on a ‘fractional reserve’ system like banks do, reselling the same stock several times over.

How to get started

Whichever bullion dealer you choose, you will be asked to register with them, by providing identity and residence details. (At BullionRock, ID is only required if you are investing more than £10,000 in any 3 month period). You are then ready to trade.

When you buy, you will decide on your delivery option (to your home or a vault) and how you want to pay. Credit card payments (but not debit cards) normally attract a surcharge, and there will normally be an upper limit on card purchases: a bank transfer is often the best option for larger amounts.

You then ‘lock prices’ based on the market that day, and your order is placed. Prices of gold are driven by a twice-daily ‘London gold fixing’, the result of meetings of the bullion trading firms: and on the continuous OTC spot price which can be followed online.

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