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Gold Mining Stocks or Physical Gold - Which Should You Choose?

Author: Ian Davis - Bullion Manager

Published: 19 Dec 2018

Last Updated: 9 Jul 2020

Synopsis

In this article, we share our opinions and views on whether stock or physical gold is the best option for investing in gold.

2018 Sovereigns

Gold Stocks or Gold Mining Stocks

Gold stocks are essentially shares in a mining company who either exclusively mine gold or have a significant portion of their operation in the metal. When you buy shares in these companies you are buying into the premise that the company is effective, well managed and truthful in their reporting and forecasting. There is a serious amount of trust required if you are investing your retirement nest egg or any substantial sums of money!

The value of your gold stocks are not only related to gold price but a number of other factors too. These include company health, workforce, active mines and exploration potential for new sites. This means each gold stock can be priced differently which is very different to physical gold traded at low premiums above an internationally recognised spot gold price. So, physical gold is much more stable and this does not change regardless of which country you reside in. This means you can trade gold anywhere for almost the same value once currency fluctuations are built in.

Remember, beyond the broker or your online brokering site you are essentially investing in the company, their staff and the management board. It goes without saying people can be corrupt and fail you. So, if you make the wrong bet on which company to choose you could find yourself losing quite a lot of money. On the other hand, making the right choice of mining company you can see your investment grow significantly if mining operations go as planned. A second thing to consider is how difficult it can be operating a mine, often in third world countries, due to corrupt governments or a striking workforce. When you think about it, there is a quite a lot beyond your control. However, if you own physical gold you are in direct contact with your investment eliminating these problems.

We don't see gold mining stocks as any different to other stocks in terms of investment risk as you are betting on a company’s success. Granted mining shares increase in value during recessions, as mining activities are linked to global demand for gold, but you still end up with a range of companies to choose from. If you are looking to make rapid gains, mining stock is likely to be the better option over physical gold. This is because physical gold ownership is more a hedge against inflation, a means to preserve wealth, rather than making quick gains.

One of the benefits of investing in gold stocks is that investors are paid yearly dividends, where physical gold investors are not. There is even a potential that gold stocks will return dividends even during difficult times. However, if the gold price drops, this is not guaranteed and tied to many other factors in the industry. Gold stocks are not the only way to gain benefit from gold prices with many companies offering unallocated storage, exchange traded funds (ETF's) and even paper gold. Our opinion is that none of these come close to the benefit-risk balance of physical gold ownership.

Some advice if you are indeed interested in gold stocks would be to identify the dominant players in the market, analyse earning, accuracy of forecasts to earnings, contribution to industry news and simply research as much as possible before making an investment. We have known people to watch a market for 2 to 3 years before making an investment. Even placing "fake" investments to see how their predictions turn out.

If we had a crystal ball, we could tell you which mining company to pick long term, but we don't and neither does anyone else. Take each piece of advice for what is (i.e. not a prediction) and make your own informed decision. If you are looking to preserve wealth and move away from currencies, physical gold is likely your better option. 

Physical Gold Ownership

Gold is very liquid and can be cashed in quickly at any bullion dealer in the world. You can view our selling page for up to date live buy back prices. Spot gold price is internationally recognised, which means you can buy and sell in any country of the world. Not only can you cash in quickly you can store large amounts of money in a very small space as gold is very dense.

Various 1 Kilo Gold Bullion Bars

Compact and Easily Stored

For example, a 1kg gold bar has measurements of roughly 80mm x 40mm x 18mm and we are currently buying these for £37,488.57. It is quite easy to keep 10 or even a hundred of these in a very compact space beneath floorboards, buried in the yard or anywhere else you want to hide it. If you are not inclined to hide such large amounts of money, you could take advantage of our state of the art storage facilities. We offer low priced storage in our on-site strong rooms. 

Physical gold is probably the best hedge against inflation and a market downturn we know of. Regardless of market performance and global events, gold is tangible asset that has forever had a high value, and its stable price makes it a safe haven for those wishing to deposit large amounts of money. 

A downside to physical gold would be that you can't make profit gains during a market upturn as prices relative to stocks will remain low. Again, you need to consider your reason for investing because if you are trying to preserve wealth this shouldn’t be too much of a worry.

Conclusion 

If you are investing in anything, we recommend you diversify. Firstly, if you are looking at precious metals, we believe physical gold ownership should come first and then if you wish to go for paper gold, ETF’s or gold mining stocks go for it!  This way you benefit during recessions and upturns, and with the correct timing and exit strategy you could see yourself earning a nice profit. Understanding when to offload or buy physical gold and stocks (or ETF's) is important. As is making sure you don’t get caught out by market trends. If you do not wish to watch the stock market every day or read financial news, you might be better investing in physical gold which has a far more stable price. You will have to accept that you may not make as much money, but your wealth will be preserved should you wish to cash in sometime in the future. 

The association between stocks and gold is real and cannot be ignored. Although, there are stark differences between the two. Your reasons for investing should lead the decision. Physical gold is best placed as a long-term investment, whereas stocks can be played with a view to short term gains. Just remember that companies are run by people, can be corrupt and even fail. This is not the case with physical gold. We prefer to keep our investment in our control and ours alone without involving brokers and various third parties. 

Finally, we are not financial experts and all we can do is share our experience and opinions on these matters. We recommend you speak to a financial adviser if you are looking to diversify and invest substantial money. 

Further Reading

You may wish to view all of our articles on our gold guide.

You may wish to view all of our articles on our silver guide.

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This guide and its content is copyright of Chard (1964) Ltd - © Chard (1964) Ltd 2021. All rights reserved. Any redistribution or reproduction of part or all of the contents in any form is prohibited.

We are not financial advisers and we would always recommend that you consult with one prior to making any investment decision.

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