Gold Mining Stocks vs. Physical Gold as an Investment

Gold mining stocks and physical gold offer two ways for investors to benefit from gold price movements, however each of these investments differs in terms of risk, returns, liquidity, and more. If you’re tossing up between these two investments and wondering which is most suitable for you, continue reading.

In this article, we’ll explore gold mining stocks versus physical gold as an investment, including the benefits and drawbacks of each, key differences between the two, and how to know which is best for you.

What are gold mining stocks?

Gold mining stocks are shares of companies involved in exploring, extracting, or producing gold, such as mining operators or companies that manage gold resources. Examples of gold mining companies include Newmont Corporation, Barrick Gold, and Agnicao-Eagle Mines.

Investing in gold mining stocks allows people to gain exposure to the gold market without directly owning physical gold. While stocks often correlate with the price of gold, their performance is also influenced by other factors like a company’s performance, management, mining efficiency, and geographic location. Economic downturns, fluctuating gold prices, and operational challenges can all negatively impact a company’s profitability and therefore its stock prices.

That said, the potential for returns can also be higher. If a company expands its operations or discovers new reserves, its stock value can increase significantly. Some gold mining companies also pay dividends that provide investors with regular income in addition to capital gains.

How to invest in gold mining stocks

There are different ways to invest in gold mining stocks, including buying shares in an individual gold mining company, purchasing gold ETFs, or investing in a gold mutual fund.

Buy shares in a gold mining company

This involves investing in individual gold mining companies by purchasing their stocks. Before buying shares in a company, it’s important to research factors like financial health, production capacity, and geopolitical risks.

Larger companies, like Barrick Gold or Newmont Corporation, tend to be more stable and less volatile, while smaller ‘junior’ mining companies can offer higher rewards but come with greater risk and volatility.

Gold mining exchange-traded funds (ETFs)

Gold mining ETFs provide exposure to a basket of gold mining companies in a single investment, reducing the risk associated with investing in individual companies. They’re a good option for investors looking for diversification without having to research individual companies.

Popular gold mining ETFs include VanEck Gold Miners ETF (GDX) or iShares MSCI Global Gold Miners ETF (RING).

Continue Reading: Everything You Need to Know About Gold ETFs

Mutual funds

Gold mutual funds are similar to ETFs, only they’re actively managed. These funds pool money from multiple investors to invest in a curated selection of mining companies, usually chosen based on the fund manager’s strategies and expertise.

Benefits of investing in gold mining stocks

The benefits of investing in gold mining stocks versus physical gold include the potential for higher returns, dividend payments, and high liquidity.

Potential for higher returns

Gold mining companies have the potential to outperform gold prices during a bull market. When gold prices increase, gold mining companies see more profits. This can amplify returns for investors.

Dividend payments

Some gold mining companies pay dividends that provide investors with a regular income stream as well as the potential for capital gains.

High liquidity

Gold mining stocks are highly liquid and can be bought and sold on stock exchanges at the click of a button. This makes it easy for investors to react quickly to market changes compared to physical gold.

See: Where is the best place to sell gold?

Drawbacks of investing in gold mining stocks

The risks, or drawbacks, of investing in gold mining stocks include being highly volatile, exposed to operational risks, and less effective as a hedge.

Market volatility

Gold mining stocks are known for being highly volatile. Their prices are influenced by a range of factors including fluctuating gold prices, operational success or failures, and investor sentiment in the broader stock market.

Operational risks

Gold mining companies face various operational risks, such as equipment failures, environmental regulations, or geopolitical tensions. Challenges in any of these areas can negatively impact a company’s performance, and therefore its stock price.

Less reliable as a hedge

Unlike physical gold, which is widely considered a safe-haven asset during economic downturns, gold mining stocks tend to follow broader stock market trends. Their value might decline during market downturns, making them less effective as a hedge against inflation or volatility.

What is physical gold?

Physical gold refers to tangible assets like gold bullion bars, coins, or jewelry. The value of these investments is tied to gold’s spot price, unlike gold mining stocks which are influenced by various factors like company performance and broader stock market trends.

Physical gold bullion is often used by investors as a store of value. It’s considered a safe haven asset that provides stability and protection during periods of market volatility or economic uncertainty. This makes it an excellent investment for those wanting to preserve their wealth or diversify their investment portfolios.

See: Exploring the Role of Gold as an Effective Hedge Against Inflation

How to invest in physical gold

There are many ways to invest in physical gold, including purchasing gold bullion bars, gold coins, or gold jewelry.

Gold bars

Gold bullion bars are made from investment-grade gold with a purity of at least 99.99%. They’re available in a range of sizes – from small one gram bars to larger kilogram bars – making them suitable for investors with different budgets.

Gold bars generally carry lower premiums compared to gold coins, making them more cost-effective for bulk purchases. This type of gold investment is popular amongst serious investors, institutional investors, and central banks.

Gold coins

Gold coins combine the intrinsic value of gold with added collectible appeal. They’re available in numerous denominations, from 1/10 of an ounce up to 10 oz and even more for some coins.

Popular gold bullion coins include the Canadian Maple Leaf, Vienna Philharmonic, and South African Krugerrand. Because of their design and minting costs, gold coins often have higher premiums than bars – but they’re a good option for investors wanting to make smaller purchases.

Gold jewelry

Gold jewelry offers a unique combination of both investment and personal adornment. That said, jewelry is less efficient as an investment vehicle as it involves additional costs to account for design, craftsmanship, and brand prestige – meaning investors will be paying for more than just the gold content.

Still, gold jewelry can be a tangible store of value, particularly wearable gold bullion jewelry which is sold closer to the gold spot price.

See More: Minimum Amount to Invest in Gold?

Benefits of investing in physical gold

Investing in physical gold offers the benefits of stability, security, no counterparty risks, and universal appeal.

Stability & security

Physical gold is known for retaining its value over time, making it a reliable hedge against inflation and currency devaluation. Unlike other assets tied to market sentiment or corporate performance, gold’s value remains stable. This provides investors with the security many of them are looking for.

No counterparty risks

When you invest in physical gold, you’re buying the asset outright. This eliminates the risk of default or failure associated with companies or other intermediaries. Unlike gold mining stocks, you’re not depending on the financial health or actions of another party.

Universal appeal

Gold is universally recognized as a store of value. You’ll be hard-pressed to find someone who doesn’t see the value in physical gold. This universal acceptance means gold can easily be sold or traded virtually anywhere in the world during times of need.

Drawbacks of investing in physical gold

While physical gold has numerous benefits, it also has a few drawbacks, including additional storage considerations and no dividends.

Storage & insurance costs

Physical gold requires secure storage, whether that’s at home, in a safe deposit box, or in a professional vault. Each of these options comes with additional costs like storage fees or insurance to protect against loss or theft. These expenses should be factored into your overall investment strategy and budget.

See: What is the Proper Way to Store Gold?

No dividends

Unlike gold mining stocks, physical gold doesn’t generate dividends or income. Its value only grows as the market price of gold increases.

Gold mining stocks vs physical gold

Gold mining stocks and physical gold differ in many ways, including type of ownership, risk, income potential, liquidity, and tax considerations. Let’s take a look at each of these in more detail.

Type of ownership

Investing in gold mining stocks means owning partial shares of a company involved in producing or extracting gold. Your investment is tied to the company’s operations, profitability, and management. The value of gold mining stocks will fluctuate with the company’s success or failure.

With physical gold, you own a tangible asset that can be held in your hands. Its value is tied purely to the market price of gold.

Risk and reward

Gold mining stocks are considered high-risk and high-reward investments. Stock prices can rise sharply during bullish gold markets but can also be volatile due to factors like geopolitical tensions or company issues.

Physical gold, however, is seen as a lower-risk investment. Its value tends to remain steady over time, offering a hedge against inflation and economic downturns.

Income potential

Some gold mining stocks pay dividends, which can add an additional income stream alongside potential price appreciation. This makes them an appealing option for those looking for income-producing investment.

Physical gold doesn’t generate any income and its value only grows with the market price of gold.

Liquidity

Gold mining stocks are highly liquid and can easily be bought and sold on stock exchanges with the click of a button. This makes them a good option for investors wanting to respond quickly to market changes.

Physical gold is also highly liquid, but selling it can be more time-consuming. The process of selling gold usually involves finding a buyer, authenticating the gold, and sometimes additional costs for transportation.

Learn More: Selling Gold: How to do it right

Tax considerations

Profits from gold mining stocks are generally treated as capital gains and taxed at the applicable rates based on your jurisdiction.

Physical gold investments are also often subject to capital gains tax (CGT) when sold. However, the exact tax implications of physical gold can vary depending on the type of gold (gold bars versus gold coins) and jurisdiction. In the UK, for example, bullion coins produced by The Royal Mint are exempt from CGT. These include the Britannia, Sovereign, and Tudor Beasts coins.

Keep Reading: The British Gold Sovereign - All You Need to Know

Comparing gold mining stocks with physical gold

The table below summarises the key differences between gold mining stocks and physical gold.

	GOLD MINING STOCKS	PHYSICAL GOLD
TYPE OF OWNERSHIP	Shares in a company	Tangible asset with intrinsic value
VOLATILITY	High	Low
PRICE INFLUENCES	Gold’s market price, company performance, market conditions, geopolitical factors	Gold’s market price
INCOME	Potential income through dividends	No additional income
LIQUIDITY	Highly liquid and can easily be bought and sold on stock exchanges	Also liquid, but the selling process can take longer and involve additional costs
TAX CONSIDERATIONS	Usually subject to capital gains tax (CGT)	Certain gold coins are CGT-free

Should I invest in gold mining stocks or physical gold?

If you’re still not sure which type of gold investments is best for you, here are some questions to consider.

What are your investment goals?

The first thing to consider is what you’re hoping to achieve with your investment. Do you want to grow your wealth quickly or preserve it over time?

If you’re looking for higher returns and are comfortable with taking on more risk, gold mining stocks could be a good option. If your priority is to preserve your wealth over time, then physical gold is likely a better fit.

How much risk can you tolerate?

Next, think about how much risk you can tolerate. Gold mining stocks generally carry more risk because they depend on business performance, market conditions, and external factors like geopolitical tensions. This makes them better suited for investors who can handle some risk.

Physical gold, on the other hand, is much lower risk. Its value isn’t tied to management decisions or operational challenges, and it carries no counterparty risk.

How much diversification do you need?

Gold mining stocks can add diversification to an equity-heavy portfolio by providing exposure to both gold prices and the broader mining industry. That said, because they’re closely connected to the stock market, they may not be able to properly diversify a portfolio.

Physical gold is uncorrelated with both stocks and bonds, offering more diversification compared to gold mining stocks. Gold can act as a stabilizing force that protects a portfolio during economic downturns.

How much effort do you want to put in?

Investing in gold mining stocks requires careful research and active monitoring of a company’s performance and market trends.

Physical gold, on the other hand, is a more straightforward investment. Once you’ve purchased your gold and stored it securely, you can sit back and watch your investment appreciate over time.

See More: Gold vs Shares - FTSE 100. Should I buy physical gold over FTSE 100 shares?

Start investing in physical gold today

While gold mining stocks can offer a way to benefit from gold’s price movements, nothing compares to owning a tangible asset with intrinsic value. If you’re ready to start preserving your wealth with the timeless value of gold, you’re in the right place.

At StoneX Bullion, we stock a wide range of gold bullion bars, coins, and wearable bullion jewelry from the best-known mints in the world. Browse our collection now and start growing your wealth today.