Gold or Gold Mining Stocks: Which is a Better Investment?

The Spotlight

5 minutes read

May 17, 2024

A man comparing gold and silver starts or physical gold vs. mining stocks

Investing in gold is seen as a wise long-term investment. But can you get better returns investing in gold mining stocks? Let’s find out.

The best gold stocks, including top gold mining stocks and gold mining stocks that pay dividends, can be a potentially lucrative investment.

Most precious metals investors have looked at gold mining stocks at some point.

The potential to receive dividends – payments shared from the company’s profits – also makes this type of gold stock appealing to 'buy and hold' investors, those who buy shares and keep them for the long term with the goal of riding out market volatility.

There’s a widely held belief that if the price of gold rises then the price of the best gold stocks, including gold mining companies, will too. But is this true?

And what are the differences between the best gold investments, like physical gold and gold mining stocks?

🔎 Let’s find out.

What are gold mining stocks?

A man looking at his own reflection that looks like a question mark

Simply put: gold mining companies, also known as gold companies, are businesses that mine gold. They include mining operators and companies that manage gold resources such as Newmont Corporation, Barrick Gold, Agnico-Eagle Mines and AngloGold Ashanti.

If you buy stocks in a gold mining company you effectively become a co-owner in that company.

This means you share in its success, for example through the distribution of dividends.

If a company is successful, it's likely that the price of its shares will rise.

In this case, the shareholder can profit by selling their shares.

Gold vs gold mining stocks: what is the difference?

A woman standing on the balance and comparing an orange and an apple

Physical gold bullion:

  • Tangible asset: Gold bullion is a physical asset that you can hold, offering the classic security many investors seek.
  • Intrinsic value: Unlike stocks, gold has intrinsic value that remains even when markets are volatile, historically retaining high value regardless of economic conditions.
  • No dividends, pure gold: While you won’t receive dividends as with stocks, investing in gold means owning a piece of pure, tangible wealth.

Gold mining stocks:

  • Potential for higher returns: Stocks in gold mining companies can potentially yield significant gains, more so than physical gold, due to business growth and profitability.
  • Higher risk: The value of mining stocks can fluctuate greatly depending on company performance and management. A poorly-run company can fail, rendering your investment worthless, unlike physical gold which will always hold value.
  • Dependent on many factors: Mining stocks’ success hinges on effective management, economic conditions, and even environmental factors, making them a more complex and risky investment.

Investors navigating turbulent markets might find a safe harbor in physical gold rather than gold stocks, suggests George Milling-Stanley, the chief gold strategist at State Street Global Advisors.

“One of the reasons I own gold bars is that I believe they offer me some protection against potential downturns in the equity market,” he explained. “Gold mining stocks are ultimately equities and usually follow the broader equity market downward. They don’t provide that extra layer of protection I’m looking for.”

Why are gold stocks so volatile?

A man balancing on a volatile curve

The reasons for the volatility in gold mining stocks relate to the gold price leverage and all-in-sustaining costs (AISC):

  • Leverage This refers to gold stocks’ tendency to react disproportionately to movements in the gold price stream. While gold stocks rise significantly more when the price of gold rises, they also drop more dramatically when the price of gold falls.
  • AISC A key metric used across the mining industry, AISC represents the total production cost a company incurs to mine one troy ounce of gold. A key metric used across the mining industry.

The gold price leverage and total production costs

Here’s an example of how leverage and AISC together can affect gold mining stock:

  • A company has an AISC of $1,500, meaning it costs $1,500 to mine one troy ounce of gold. 🥇
  • The price of gold increases from $1,800 to $2,000 per ounce. 📈
  • At a gold price of $1,800 in the gold price stream, the company made a profit of $300 per ounce (1,800 - 1,500 = 300). At a gold price of $2,000, the profit is now $500 (2,000 minus 1,500 = 500) 💸
  • This gives the company a profit-per-ounce increase of 67%, even though the price of gold only rose by 11%.

Conversely, in the gold price stream falling gold prices have a greater negative impact on the profits of gold mines and mine operators. Here’s an example:

  • A company has an AISC of $1,500, meaning it costs $1,500 to mine one troy ounce of gold. 🥇
  • The price of gold falls from $1,800 to $1,600, while the AISC remains at $1,500.
  • The profit per ounce therefore falls from $300 to $100 – a drop of 67%, while gold fell only 11%. 📉

As we can see from these examples, changes in the relationship between the price of gold and the AISC can impact the stream of profits for gold miners and their shareholders.

If the total production costs remain the same, profits increase disproportionately when gold prices rise and decrease disproportionately when gold prices fall.

Gold and gold mining stocks are two very different investments

A man drawing a new arrow

Whether to invest in gold mining stocks or not depends on the investor’s personal circumstances and individual risk appetite.

It’s important to consider these factors before deciding to invest in gold stocks.

In general, however, shareholders should be aware that gold mining stocks and physical gold are two very different investments with clear advantages and disadvantages. ⚖️

This knowledge is crucial in making the best gold investment. Here’s why:

  • Stability of value and risk of default: As a naturally limited raw material, gold is relatively unlikely to lose its value. Conversely, there have been repeated examples throughout history of stocks whose value fell to zero. This is where the importance of limited physical gold resources comes into play.
  • Dividends: Gold mining stocks can – but are not required to – pay dividends to their shareholders. Gold, on the other hand, will not earn interest or pay dividends to investors. This is a key consideration for those looking at gold stocks with dividends.
  • Volatility (price fluctuations): Gold stocks are subject to considerable price fluctuations, while gold is relatively stable in value.
  • Security vs. ppportunity: If you value long-term security and a tangible asset, gold bullion is the way to go. For those looking for possibly larger gains and can manage more risk, mining stocks might be appealing.
  • Different investment natures: Although both are linked to gold, the nature of these investments is fundamentally different. Bullion offers straightforward value, while stocks offer a stake in the business dynamics of mining companies.

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