Gold has long been considered a safe place during economic uncertainty. Many investors have turned to precious metal investments after purchasing stocks in mining and exploration companies. There are numerous advantages to purchasing gold stocks rather than a physical commodity. Because businesses can increase their operations, and profits when the price of the metal rises, they can likely generate higher returns for investors than simply investing in physical gold.
Because of this growth, the companies’ stocks should outperform the price of gold. However, not all gold stocks outcompete the price appreciation of this precious metal, so investors must exercise caution when selecting stocks. In this article, we discuss everything you need to know about buying gold stocks.
Is It a Good Idea to Buy Gold Stocks?
There are numerous advantages to purchasing gold stocks rather than a physical commodity. The main attraction is that these mining companies offer the possibility of leveraged upside in gold prices. When the value of gold rises, these companies can increase their production and their total sales. Gold stocks are publicly traded stocks of gold-focused companies. Mining companies that extract and sell the metal make up much of the industry.
However, gold royalty and streaming companies, which serve as middlemen, also form part of the industry. These intermediary companies pay an affiliated company an upfront fee in exchange for a share of the company’s revenue. Gold investors can also invest in gold exchange-traded funds, or ETF, which hold shares, or physical gold in mining companies.
Gold Stocks Versus Buying Gold Investments
Buying gold shares in a gold mining company, like any other stock, carries some risk, but it also means you have full control over which gold companies you invest in. A few investors, for example, may prefer a gold mining company that is committed to protecting the environment over one that does not. Indeed, owning gold stocks does not allow you to own physical commodities, but it does provide you with the financial advantage of an asset that you can sell at any time.
When most people think of investing in gold, they envision buying the physical commodity, also known as bullion. Physical gold bars and gold coins are common examples. While it is the most exciting way of investing in gold, it is also the most difficult to store, buy, or sell. While jewelry can often increase in value over time, appraising it can be tricky, and there is no guarantee that you can make a profit from its sale.
Most people avoid investing in stocks because they are afraid of stock market fluctuations. When the stock market’s movements make you anxious, try to keep a long-term perspective, and keep in mind that stock market volatility is a normal occurrence. Sticking to your investment plan, rather than buying gold bars, is often the best thing you can do for your portfolio.
Understanding the Factors That Affect the Price of Gold
Before you buy gold commodity stocks, it is important to first understand what influences the price of this commodity.
1. Reserve Banks
Central banks keep paper money and gold on hand in reserves. The price of this commodity typically rises as a bank diversifies its reserves away from regular currencies, and toward gold. Many countries have reserves composed primarily of gold.
2. The US Dollar
Because gold is denominated in US dollars, its price is generally inversely related to the value of the US dollar. Provided no other factors change, a stronger US dollar results in lower gold prices, whereas a weaker US dollar could cause an increase in the price of the commodity due to increased demand. Demand may be higher because more gold can be purchased when the value of the US dollar is weaker.
The value of gold is also influenced by supply and demand. As the demand for goods made with precious metal, such as gold jewelry and electronics, rises, so does the price of gold. It also rises when there is a greater demand for investments in the commodity.
4. Gold Mining
Gold is more difficult to obtain, which creates additional issues. Miners are exposed to hazards, thereby increasing the environmental impact. To put it simply, it costs more to get a smaller quantity of the commodity. Increased mining costs, increase the price of gold. It is important to keep in mind that when you invest in gold stocks, as opposed to just purchasing the commodity, the price of the stocks may not move with gold bullion stock prices. The operating performance of the company you choose to invest in has a greater influence on the price of the stock.
Three of the Best Gold Mining Stocks
These are the three best gold mining stock companies to invest in:
- Barrick Gold – a major mining company
- Franco Nevada – a royalty and streaming company
- VanEck Vectors Gold Miners ETF – an EFT that holds the shares of several prominent gold mining stocks.
1. Barrick Gold
Barrick Gold aspires to be the world’s most valuable mining company. It is based in Canada and focuses on Tier One mining assets. They have a production capability of 500,000 ounces of gold per year and operate at a low cost. The company is likely to be able to produce the metal at a steady rate for years by focusing on operating large mines with significant remaining resources. Barrick anticipates that the average yearly gold production of its mines is around five million ounces until 2030.
It has also predicted that its costs could fall from around $1,000 per ounce in 2020 to around $800 per ounce by 2025. Even if the value of the asset decreases slightly, Barrick Gold’s profits should continue to increase, making it a worthy company for investments.
2. Franco Nevada
Franco Nevada is a royalty and streaming company that is based in Canada. It has agreements to receive gold and silver, platinum group metals, oil and gas, and iron ore. Gold accounts for approximately 70 percent of the company’s revenue. The fact that Franco-Nevada focuses on royalties and streaming protects it from the operating and capital cost overruns that tend to affect mining companies. As the company’s mining collaborators accomplish expansion and exploration projects, Franco-Nevada profits with them.
Its royalty and streaming contracts allow it to make a lot of money by selling the tangible commodities that it receives. This cash flow allows the company to take on new opportunities, and pay a dividend, which the company has increased year after year. In addition, the company has a debt-free balance sheet as of the beginning of 2021, which is unusual in the mining industry.
Because Franco-Nevada profits significantly from gold mining while avoiding the associated risks, the company’s stock has outperformed both the gold and mining sector, making it an excellent option investment.
3. VanEck Vectors Gold Miners ETF
The VanEck Vectors Gold Miners ETF invests in large gold mining companies stocks. With nearly $16 billion in assets as of mid-2021, it is one of the largest gold ETFs in the world, currently owning shares in over 50 gold mining companies, including Newmont Goldcorp, Barrick Gold Corporation, Franco Nevada Corporation, Wheaton Precious Metals, and Newcrest Mining.
VanEck ETF’s assets are made up of more than 46 percent of these five stocks, with Newmont Goldcorp accounting for over 15 percent. The market capitalizations of these stocks range from $56.9 billion for Newmont Goldcorp to $17.7 billion for Newcrest Mining. These top holdings, except for Wheaton Precious Metals and Franco-Nevada, are the world’s most prominent gold mining companies, and the leading royalty and streaming companies are Franco-Nevada and Wheaton Precious Metals.
The ETF allows gold investors to own a diversified, high-quality range of large gold companies. It also has a satisfactory expense ratio of 0.51 percent, which makes it a relatively low-cost way to invest in gold stocks.
How to Purchase Gold Stocks, EFTs, and Gold Mutual Funds
Investing in a mutual fund, stock, or gold ETF is one of the most effective ways to include gold in your investment portfolio. You need a brokerage account to buy gold stock online, which you can set up with an online broker. After you have funded your account, you can select the assets you prefer, and place an order via the broker’s website. Individual gold stocks and ETFs are acquired for their share price. The share price can range from under $10 to four figures, whereas mutual funds have a minimum amount, which is around $1,000.
Gold is a much sought-after commodity, and it has been the commodity of choice for many investors. Stocks are the best way to buy gold as an investment. Barrick Gold, Franco Nevada, and VanEck Vectors Miners ETF are three of the best companies you can buy stock from. If you are investing in the commodity to diversify your investment portfolio, then investing in an EFT is the best option. However, if you are investing in the commodity to safeguard yourself during an economic crisis, then purchasing gold outright is the way to go.