Gold Stocks

Gold stocks

Investing in gold stocks can be quite different from investing in physical gold. And even within gold stocks, you have several options on how to invest in them.

If you just want to follow the price of gold without buying physical gold, you can buy an ETF that mimics the price of gold. These are generally more liquid than buying physical gold, simpler and have fewer costs; you don’t need to pay for storage, insurance or handling fees. They do have some drawbacks, though, as buying paper gold can leave you exposed to counterparty risk.

Another way to invest in gold is through gold mining stocks. Much like any other stock, when you buy a gold mining stock, you are not only investing in the price of gold but also investing in a company and its management team.

Buying gold mining stocks can be a way to take advantage of gold price swings. These companies generally follow the up-and-down swings of the gold spot price.

The difference is, both the rise and fall are often bigger. Think of gold mining stocks as a leveraged play on the gold price.

When the gold price moves higher, in general, so do gold mining stocks.

As an example, take a look at the chart below that shows the gold spot price in US dollars (black line), compared to gold mining companies Newcrest Mining Ltd [ASX:NCM] (orange line) and Evolution Mining Ltd [ASX:EVN] (blue line). As you can see, Newcrest and Evolution experienced more volatility in the same period.

At times, gold stocks can outperform gold when gold prices rise because higher gold prices mean better profit margins and more cash flow for gold miners. While costs may stay constant, the higher the price of gold per ounce, the better the profits.

However, when the gold price falls, the profit margins of these companies tend to fall as well. In short, more volatility means more chances to get great gains, but also presents greater risk of losses.

Buying gold shares on the ASX

There are many gold stocks on the ASX; after all, Australia is one of the largest producers of gold in the world.

You can buy all sorts of miners with different risk profiles. They range from large gold miners like Newcrest Mining Ltd [ASX: NCM], Evolution Mining Ltd [ASX:EVN], and Chalice Mining Ltd [ASX:CHN] to name a few, to tiny explorers.

Or, if you are looking to benefit from the long-term moves in the gold price but have a lower risk tolerance, you could always consider an Exchange Traded Fund (ETF).

Here you have a few options. You can buy an ETF that holds a group of companies involved in mining.

For example, the VanEck Vectors Gold Miners ETF AUD [ASX:GDX] gives you exposure to about 50 gold mining companies around the world. Or the BetaShares Global Gold Miners ETF — Currency Hedged [ASX:MNRS], which invests in the largest gold miners around the world, excluding Australia.

Or, if you are just looking to get exposure to gold prices without buying the physical stuff, you can look at an ETF that tracks the price of gold, like ETFs Metal Securities Australia Ltd [ASX:GOLD] or Perth Mint Gold [ASX:PMGOLD].

As with any stock investing, gold stocks can carry various degrees of risk, which must be considered, before investing.

If you’re keen to learn more about investing in gold mining companies — including gold producers and explorers — then this section on gold stocks is a must-read.