Should You Invest in Gold Stocks or Gold Bullion?

- September 16th, 2019

What is the difference between gold stocks and bullion? Find out if now may be the best time to add them to your portfolio.

As the price of gold continues to climb, many investors have begun to wonder if they should buy gold stocks or gold bullion.

While gold investing can act as a hedge in one’s portfolio, market participants must first determine which avenue they would like to choose in order to obtain the precious metal.

Read on for an in-depth look at gold stocks and gold bullion and why one, or both, may be the right investment for you.

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Gold stocks or gold bullion: What is a gold stock?

Like all publicly listed stocks, gold companies issue shares that are available for investors to trade. When you purchase shares of a gold stock, you are essentially purchasing a stake in the company, making financial returns or losses from its profits.

There are two main ways that an investor can purchase stocks from gold miners. The first way is when market participants purchase through a major mining company. The other way of trading on the stock market is by investing in a gold mining stock through a junior miner.

It is worth noting that while both avenues have their pros and cons, if you invest in a junior gold stock, it can be inherently risky. Since these companies often fail due to the risks associated with exploration and development, you stand a greater chance of also taking on a loss when you buy gold this way.  

Finally, market participants can also obtain gold shares through investing in gold streaming and royalty companies. You can learn more about royalty and streaming stocks here

Although no gold stock investing is 100 percent foolproof, backing a successful mining company in the precious metals space can alleviate some of the stress of a down stock market when you keep in mind that if a company’s share price goes down, it becomes more affordable to purchase and investors can more than likely anticipate that it will rise again and turn a profit.

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Gold stocks or gold bullion: Factors that affect the value of a gold stock

While gold stocks are affected by some of the same factors that shape and shift the price of gold, they keep some distance from a direct correlation because it is possible for a gold miner and its stocks to be doing well even in a down market. 

Due to this, what affects the value of a gold stock can be broken down into internal and external factors. Internal factors surround the source of the stock — the gold mining company and the production of the yellow metal within the gold space. External factors deal with the state of the economy, the power of the US dollar, interest rate hikes or cuts and possible geopolitical issues — all of which have direct consequences on the price of gold.

Internal factors

The first factor that can shape a gold stock for better or worse is the gold producer that you, as an investor, have purchased the stock from. As previously mentioned, there are two main ways to make gold stocks an asset in your portfolio. The first is through large cap gold companies, which are known for the lower level of risk that comes with investing in them. While some companies have an easier time multiplying share price than others, investors are not likely to experience stock that rises 10 times in value (also known as a 10 bagger). 

Despite not being able to rocket in price, investing in a large cap company also protects market participants from large swings within the market. If there are no bolstered gains, there are no extreme losses either. A large gold producer is generally easy to value as they sell at large-cap valuations. 

The second way of gold stock investing is through small cap companies. Investing in junior mining stocks can be tricky, and it is often challenging for investors to fund the right winners within the stock market. 

If a junior makes a big discovery, very few of them have the mining operations necessary to develop a property; for many, the goal is to hit upon a deposit that’s attractive enough to catch the attention of a major producer that will buy it from them at a profit.

Even though the odds of success are low, many investors are attracted to junior mining stocks because, as resource specialist Peter Krauth of Money Morning writes, “all it takes is just one 10 bagger to make up for all the dogs in the pound.”

This is to say that market participants must do their due diligence in the company they purchase stock from because this will have a direct impact on the value of a gold stock. The Investing News Network has put together a handy guide of investment tips, which would be beneficial to anyone looking to invest in gold on the stock market.

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The second internal factor that sways the value of a gold stock is production of the yellow metal. When investing in gold stocks, it is important to understand that they have a direct relation to gold production. If an investor has purchased a share from a company that is experiencing a high level of production, they can get more for their return based on those production rates. 

However, the downside to this relationship can be seen if an investor has purchased shares from a company that is experiencing low levels of production or if extraction of the yellow metal has cost the company a significant amount of money. Production can also be negatively pressured by harsh environmental issues where the mines reside, shutdowns due to care and maintenance and even mine strikes from local workers.

When looking at gold stocks from the lens of how it can be affected by gold production, it appears to be an investment with more risk for more reward. 

External factors 

Due to the fact that gold stocks will be affected by the price of gold, the variants that move the price of gold also have the potential to send the value of a gold stock either up or down. 

With gold recently shooting past the US$1,500 per ounce level for the first time in over six years, external factors are currently affecting the price of gold in a positive way. The first element supporting gold, is the fact that the US dollar has lost a lot of the steam that it gained last year and into the beginning of 2019. Since gold has a negative correlation to a thriving greenback, the dollar’s recent decline has been supporting the yellow metal and in turn the value of many gold stocks.

Secondly, a basket of geopolitical issues have sent investors running towards the safe haven nature of gold. Most recently, trade war tensions have ratcheted up since US President Donald Trump announced last week that the country will be adding a 10 percent tariff on another US$300 billion worth of Chinese imports. The new tariffs will come into effect on September 1. Since then, China has stopped new purchases of American agricultural goods and has devalued its currency in an effort to minimize the effects of the tariffs.

Finally, gold and gold stocks are being supported by an interest rate cut, which was implemented by the US Federal Reserve at the end of last month for the first since 2008. While the metal initially retreated following the announcement, it has since steadily increased once the decreased rates were put into place.

While the yellow metal and in turn gold stocks are currently experiencing a bull market and are being positively affected by outside forces, these are the same factors that can also cause gold and gold stocks to dip. When the US dollar is rallying, when gold becomes too expensive to hold and when the Fed decides on an interest rate hike instead of a cut, the markets will generally see a decline in the price of the precious metal, as well as they ways in which it can be invested. 

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So, what are some of the current best gold stocks to buy? Check out INN’s list of the Best Gold Stocks of 2019 on the TSX.

Gold stocks or gold bullion: What is gold bullion?

In order to understand the difference between investing in gold bullion versus investing in a gold stock, let’s break down what gold bullion is and how it is traded.

Gold bullion is physical gold in the form of gold bars, gold coins and jewelry and investing in it is the most direct way to access the yellow meal. 

Many gold bullion investors are generally looking for items that are 0.999 fine. Several products fit this description, and one of the most preferred is gold bullion coins, such as the South African Krugerrand or the American Gold Eagle.

Another option is gold rounds, which are similar to coins, but are not legal tender. Both gold coins and gold rounds come in various sizes, usually ranging from 1/10 ounce to 1 ounce, though other less common sizes are available.

Investors also access gold bullion via gold bars, which, like gold coins, come in a variety of sizes.

Gold stocks or gold bullion: How to invest in gold bullion?

Gold buying can be done through government mints, private mints, precious metals dealers and even jewelry stores. Before making a purchase, investors should remember to be careful to avoid numismatic coins or other gold items geared toward collecting and gift giving. These products are for play in a different ball game and are not what the average gold investor needs.

When choosing where to buy gold, it is again best to give thought to reselling it. Some businesses that sell gold will also buy it back. Some will even buy gold that they didn’t sell, but may pay lower prices for it than for items they sold.

Furthermore, premiums and fees are not one size fits all. Different sellers may offer the same items at different prices, so investors should take the time to find the best deal from an economic standpoint. 

Alternatively, market participants can also make a profit through an exchange-traded fund (ETF) that follows the price of gold bullion. 

Gold stocks or gold bullion: Gold ETFs

While there are two ways to invest in gold ETFs, ones that track price changes that the metal goes through are the types that involve gold bullion. The other type deal with investing in gold companies.

ETFs that follow the price of the yellow metal can give investors access to gold by holding either physical gold bullion or gold futures contracts. It is important to keep in mind that investing in these gold ETF platforms does not allow investors to own any physical gold — even a gold ETF that tracks gold bullion cannot be redeemed for actual the actual yellow metal.

Gold ETFs are often considered a lower risk investment and have a number of benefits for market participants. For example, gold bullion is known for being a hedge against economic and political uncertainty, and owning shares of a gold bullion ETF provides investors with this same security — without the hassle of buying and storing the yellow metal.

Since gold tends to rise when the US dollar is weak, purchasing a gold bullion ETF could balance out any investment that has the potential to decline when the greenback does. Conversely, selling gold ETF holdings can be beneficial when the US dollar is making gains.

Of course, you don’t necessarily have to choose between the two options. Rob McEwen, chairman and chief owner of McEwen Mining (TSX:MUX,NYSE:MUX), prefers to open his portfolio to both gold investing options, telling the Investing News Network, “Myself, I have a large holding of gold bullion and then I have a very big position in my own company, McEwen Mining and then I’ll buy (in) the junior space more than the seniors (as) it’s not as liquid but you have more explosive moves.”


INNdepth

Want more details? Check out these articles for more INNdepth coverage.

Want and overview of investing in gold stocks? Check An Overview of Gold Stocks and Price.


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Securities Disclosure: I, Nicole Rashotte, currently hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

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