When investing in gold, the first thought that comes to mind is to invest in the physical metal. After all, having gold readily available allows us to do business quickly due to the liquidity of the commodity. On top of that, gold is usually linked with a feeling of wealth, which attracts us even more.
However, physical gold can have its problems. It is an expensive material and tends to attract attention, so it is necessary to hire specialized services for both transportation and security. This additional cost can be profitable for large investments, but those who invest in smaller amounts may be reluctant to pay additional sums.
For these cases, the best gold investment options are non-physical. Investing in ETFs, mutual funds, and stocks are the best known, but among these three, the latest are the ones that seem to give us advantages that none of the other two offer.
In this article, we will study the reasons why we should consider investing in stocks, and then we will know what kind of stocks we should buy if we want to invest in this precious metal.
What advantages do gold stocks offer us over other forms of non-physical investment?
As we well know, most of these non-physical gold investments represent that we own the gold, but we do not have it readily available. In short, we work with the material as if we had it at our fingertips, but without paying the costs of shipping and security.
However, when it comes to stocks, things are a little different. The stocks represent a percentage of a company that works with this material, so the value is not the metal itself. Its liquidity is much lower, and its price cannot be measured in weight, but at the same time, it offers another type of advantage.
The first thing to consider is that stocks are linked to the price of gold but do not have the same value. Any company that works with gold will see its stock price grow if gold’s price rises, so they work in a correlated way as the metal when it comes to generating income and protection, but owning a separate monetary value.
In second place is its most striking feature: it can generate passive income. Owning stocks of a company sometimes makes us partners of it and, in some cases, pays us dividends from the profits obtained by it. Unlike gold, where the profit will only be determined by the difference between buying and selling gold, stocks will give us income just for owning them.
What stocks should we take into account when investing in gold?
Although investing in gold stocks requires excellent expertise to determine the most profitable companies, it can be said that what affects the most is knowing how to differentiate the type of company we are working with.
There are two types of stocks that we must know to invest in gold. Here we will proceed to explain each of them and their benefits.
1. Mining companies’ stocks
Mining companies’ stocks are based on acquiring a percentage of the companies dedicated to the extraction of gold. Their price is directly related to the price of the metal, so when the metal rises, the value of these stocks is also influenced.
These stocks in turn tend to rise depending on the cycles, new deposits discovered, etc. However, depending on the company will be the type of mining stock we get.
Junior Mining Companies
They are small mining companies and their activities are related to the processes involved at the beginning of the mining cycle (either prospecting or exploration of future deposits).
Their actions are riskier since they depend on whether or not they can get deposits. However, if they manage to get them, they are highly profitable.
Senior mining companies
They are fairly solid mining companies in the market, owning large concessions and mines currently being exploited.
Their stocks tend to be more stable and linked to the price of the metal.
Among the options available to buy mining stocks, we have companies such as Newmont Corp, Gold Fields Ltd, Barrick Gold Corp, Yamana Gold Inc, Anglogold Ashanti Ltd, etc.
2. Gold streaming and royalty companies
This type of stock is based on companies making payments to the mines to obtain priority in obtaining profits from the mines or to be able to buy some of the metal coming from the mines in the future.
The stocks of these companies tend to rise with each contract reached with the mines and when they start receiving the product. On the other hand, they go down if a long time goes by without any agreement.
When should we invest in gold with stocks?
Warren Buffet is one of the world’s largest and best-known investors, having made millions through thoughtful investments. However, this investor seems to disagree with direct investment in gold because of something simple: “the profit from gold depends on someone paying more for it than you paid for it…” and “if you buy an ounce of gold, no matter what happens… you will still have an ounce and it will not produce more for you”.
This is because gold being such a stable material and designed for capital protection, generates very low income since its price is linked to its demand. In inflationary times gold becomes surprisingly valuable, while in economically stable times, it tends to devalue.
Therefore, investing in company stocks is beneficial. stocks of gold companies will generate passive income just by owning them, unlike physical gold, and they also appreciate value over time. They do not have as much liquidity and stability as physical gold, but they will certainly allow us to earn higher profits if we know how to manage them.
In general, we must consider that in times of inflation, the ideal is to manage with physical gold, while in stable times, it is best to opt for stocks of companies that work with gold.