Investors interested in gold face two main options. They can either invest in physical gold or ETFs that track gold prices or they can invest in gold stocks.
Gold stocks are a levered play on gold
Gold prices obviously affect gold companies’ profitability. Bur since they have to have fixed costs to run their business, they’re essentially a leveraged play on gold prices. The companies go up faster than gold prices and they fall farther when prices come down.
On the other hand, gold stocks have identifiable cash flows, which physical gold doesn’t have. Stocks offer dividends and capital gains. While gold can appreciate in value over time, it doesn’t offer anything in terms of regular cash flows.
Performance: Gold versus gold stocks
Historical evidence has shown that between 2007 and 2013, gold prices outperformed the share price of equities, as is clear in the above chart. There are several reasons why gold stock prices lagged behind gold prices in the recent past.
- Increasing cash cost: The quality of mines is deteriorating and more and more tons need to turn out in order to get the same amount of gold as a few years ago. This has pressured labor, energy, and equipment costs.
- Increasing capex needs: As mines deplete, companies have to put additional capital and exploration budgets in place in order to replace the old and depleted mines.
Gold or gold stocks?
When gold prices are on a sustained upward move, gold stocks provide proportionately higher returns. They definitely show greater volatility in both directions due to the added factors apart from gold price.
So more risk-taking investors can go for gold stocks like Goldcorp Inc. (GG), Barrick Gold Corp. (ABX), Newmont Mining Corporation (NEM), Agnico Eagle Mines (AEM), and Yamana Gold (AUY). You can also consider the Gold Miners Index (GDX), an ETF that invests in these stocks. These are good choices when indicators show positive prospects for gold.
But if the objective is to preserve wealth from inflation and central bank policy changes, buying gold or gold-backed ETFs like the SPDR Gold Trust (GLD) would make more sense.
To learn more about factors affecting gold price and investing in gold, see Market Realist’s guide to investing in gold.