A bullion market is a place where precious metals such as gold, silver, platinum and palladium can be bought and sold. Price depends on supply and demand. These two factors drive the underlying price which is then adjusted upwards or downwards depending on the form of the precious metal. Modern bullion markets allow small, individual investors all the way up large institutions to easily buy and sell precious metals.
Bullion markets exist for two types of customers. The first type of customer is the producer of goods that require precious metals as inputs. These customers are jewelry and electronics manufacturers as well as many other companies in industries ranging from medicine to chemicals to glass. These companies are the main drivers of demand and the reason precious metals have any value. These companies participate in the bullion market so they can ensure a steady supply of precious metals to their manufacturing facilities. The second type of customer is the speculator. These are people who buy precious metals because they think it will provide a hedge against inflation or that the price of the precious metal will increase because demand will exceed supply. While the first type of customer wants to take actual delivery of the precious metal, the speculator generally does not, which is why investment firms created precious metal derivative investments.
Participating in bullion markets has its costs. Manufacturers enjoy economies of scale that allow them to defray the cost of purchasing and transporting the physical bullion to their warehouse or factory. Manufacturers are also able to pass on the cost of transportation to their customers through the products they sell.
Investors or speculators on the other hand have to contend with various buying and selling costs depending on the type of investment they choose. If they choose to receive physical bullion into their own possession they have the cost of transportation and security that adds a significant premium to their price and requires a significant discount when they sell.
If an investor uses a firm that stores it for them then he will have to pay both a buying and selling commission plus an annual storage fee that is usually a percentage of the value of the bullion stored. The cheapest way for an individual investor to participate in the bullion market is through exchange-traded funds. These funds have very low annual operating expenses and can be bought and sold in an efficient market for only the price of a stock commission.