Gold Mining Stocks vs. Physical Gold

With the resumption of the gold bull market, many investors are wondering whether they should invest in gold mining stocks or physical gold, in order to maximize their gains or attain other investment goals, such as hedging against risk. As history shows, there are advantages to both types of gold investment, and some investors opt to invest in a combination of the two.

Advantages and Disadvantages of Gold Mining Stocks

One important advantage to investing in gold mining stocks is that, given that stocks are generally very volatile and may move with the emotional swings of the market, the potential upside of investing in stocks may be far greater than in holding physical metal. Because stocks lack intrinsic value unlike the physical metal, investors may push down the value of gold mining stocks to irrationally low levels, creating phenomenal buying opportunities for investors who are disciplined and buy at the right time.

Though gold mining shares may represent pieces of paper and lack the intrinsic value of physical gold, these shares represent ownership of an actual company that owns or leases land, expensive equipment, and has a management team and other specially-trained employees. In addition, shares represent the potential of the company from unmined physical metal sitting below-ground.

A gold mining company can increase or decrease its output depending on the market price of the metal to maximize its profit. As the price of the metal moves up in the market, mining production is likely to increase, potentially leading to significant increases in profits reflected in the stock price. Additionally, if there ever is a massive shortage of the physical metal due to global demand, shares of gold mining stocks are likely to increase substantially, as these companies will be producing a highly sought-after metal with limited competition.

Though owning gold mining stocks clearly has some advantages relative to owning physical gold, gold mining companies are at risk of bankruptcy or long periods of losses if the cost to mine the metal is greater than the market price of the metal. Additionally, these shares can fluctuate wildly in price, based on the emotions of the stock market.

Australian gold mine.

Advantages and Disadvantages of Physical Gold

Physical gold, on the other hand, has the advantage of providing immunity from shocks in the financial markets and banking system. If ever there were a shutdown of Wall Street or banks (known as a “banking holiday”) due to a terrorist or hacking attack, or due to a financial collapse, those holding physical gold in their possession would be able to liquidate their gold at any time, whereas those owning gold stocks and other financial instruments would have to wait for Wall Street or banks to reopen to gain control of their assets, assuming they are still there. The value of the physical metal is also fairly stable compared to the value of stocks and other financial instruments.

Investing in physical gold is thus a way for investors to protect themselves from a shutdown of the financial system, which has happened in the past in the U.S. and other developed countries throughout history.

However, possessing physical gold in quantity may require storage at a vault or bank that is likely to include fees. Physical gold also does not pay interest, unlike having money in a savings account or bond. Additionally, physical gold can be lost or stolen. However, during periods of very low interest rates or inflation, holding the metal can bring higher returns than a savings account or bonds.

Gold Diversification

Both investing in gold mining stocks and physical gold offer advantages for investors of the yellow metal. Some investors choose to take possession of gold to avoid uncertainties in the stock market, while others believe that gold mining stocks can bring greater long-term returns. Some investors diversify between the two to obtain the benefits of both forms of investing. The key for investors is to do their own due diligence and decide for themselves, perhaps with the help of a financial professional, what type of gold investment is best.