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Allocated Gold Bullion or Unallocated Gold Bullion? A Guide To Gold Trading

Updated on July 23, 2009

Those new to gold bullion trading are faced with two choices. Do you buy allocated gold bullion, or do you buy unallocated or non allocated gold bullion? You'll note that unallocated gold bullion is considerably cheaper, and you'll wonder why. This article explains in simple terms, the difference between allocated and unallocated gold bullion and outlines the benefits and drawbacks of each.

Simple Gold Trading Definitions:

  • Allocated Bullion is gold that actually exists and can be pin pointed as occupying a very specific point in the time/space continuum. This is the ideal type of gold for obvious reasons, gold that can be verified as actually existing is worth far more than gold which is altogether more of a nebulous concept. When one purchases allocated bullion, one is purchasing actual bars of gold.
  • Unallocated Bullion, or non allocated bullion, is gold bullion which is being traded, but which may not actually exist. How does that work? Well, banks can trade on theoretical gold holdings. Ideally, someone who purchases unallocated gold bullion is purchasing a share in a bank's gold holdings. However, a bank need not actually have any gold physically on site in order to trade in unallocated gold bullion. To make matters worse, should the bank collapse and become insolvent, any gold bullion that does actually exist immediately becomes the property of the creditors and investors who traded in the unallocated bullion are left with nothing.

For these reasons, many gold traders tend to trade in allocated bullion. When you buy allocated bullion, the gold exists, you know where it is, and it belongs entirely to you. It is not some phantasmagorical tool in the machinations of the sorts of fairy tale banking tactics which are now threatening to bring down the world markets.

Don't think that this means nobody trades in unallocated gold bullion however, plenty of people do and plenty of people make money doing it. Banks certainly make a great deal of money doing it. The advantage to trading on unallocated gold bullion is the fact that it is much cheaper than trading in allocated bullion, because it is so much cheaper to store gold which doesn't actually exist yet.

You see, when banks trade in unallocated gold bullion, they are really trading on the promise of gold bullion. If you buy unallocated gold bullion and then demand the physical product, then you will get it (after you pay some additional fees) however, most traders will never demand to see their bullion, so it remains a promise, theoretical gold. You pay the bank money for gold they don't have, and they take your money and invest it to make a profit. When you eventually trade your gold to someone else, you simply sell the promise of gold on to another party.

In the past, unallocated bullion has been a fairly safe bet. However, in times of economic uncertainty, as markets begin to right themselves, it is the flimsy futures which evaporate first, and unallocated gold is potentially, a very flimsy future indeed.


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