As the decade-long bull market charges ahead, many investors are wondering when the inevitable downturn is coming. It’s hard to say, but the market will certainly turn bearish at some point. Fortunately, gold stocks can provide a solid safety net in the event of a slowdown.  Investing in gold now, while the market is still running hot, could be a prudent move. However, the gold market is unique so there are a few things to consider before you start buying gold stocks.

How to Invest in Gold Stocks

When it comes to buying gold, investors have a lot of options.  

Making direct investments in physical gold is the most straightforward way to go. Direct investing involves purchasing actual gold bars or bullion. 

You can also invest indirectly with a variety of other financial instruments, including gold miner stocks and gold-focused funds.

If you’re an advanced trader, you can also use gold price futures or options to gain exposure to the yellow metal. However, this technique is complex so it should be reserved for more experienced investors.

gold stocks bullion physical

Why Buy Gold?

Many investors view gold as a hedge. It can provide valuable protection against an economic downturn, stock market decline, or inflation. Other benefits of investing in gold include portfolio diversification and risk reduction. On the downside, the asset class may significantly underperform during periods of sustained economic growth. Gold futures and options can be volatile and as such investing in gold stocks or funds is the more conservative approach for the average investor.

Best Gold Stocks

iShares Gold Trust (NYSE: IAU)

One of the ways to invest in gold is through a gold ETF. The iShares Gold Trust is one of the best mechanisms to get gold into your portfolio. It tracks the price of gold bullion, so it offers the same returns as holding physical gold. The IAU offers protection against inflation and gives you a way to invest in physical gold without stashing gold bars in your basement. The fund launched in 2005 and it’s generated a 10-year annualized return of around 3%, which outpaced inflation during that period. It is perhaps the most cost-effective way to invest in gold.

SPDR Gold Shares (NYSE: GLD)

State Street’s SPDR Gold fund is another great way to gain access to the price of gold. Gold bullion’s spot price is based on the supply and demand forces that dictate the 24-hour gold market. SPDR Gold Shares is also very liquid, and millions of shares trade on a daily basis. 

Gold Mining Stocks

Gold miners typically have more upside than gold trusts. However, they also have more inherent risks. These businesses tend to perform well when gold prices go up, but there is always the chance that they can encounter other operational issues that impact share prices. 

Barrick Gold (NYSE: GOLD)

Barrick Gold, the world’s largest gold mining company, has several interesting growth projects spread across five continents. However, its gold exploration plans are largely focused around Nevada. The exciting new Turquoise Ridge, Goldrush, and Cortez Deep South projects are slated to start production in 2021. 

Barrick’s recent merger with Randgold formed a gold powerhouse. The deal gave Barrick ownership of five of the top-ten gold mines in the world, and the company has the lowest cash-cost position in its peer group.  Moreover, the company’s joint venture with Newmont Goldcorp is expected to generate significant cost synergies. Together, their combined Nevada operations could become the largest gold production complex on the planet.

Franco Nevada (NYSE: FNV)

Franco Nevada is a Canadian gold mining stock. It makes money from a series of agreements, including net smelter royalties and output pacts with gold mining properties. The firm is primarily focused on generating revenues from gold and other precious metals. It also invests in silver, platinum, oil, and gas, so it’s one of the most diversified gold miners.

 The company’s much-touted Cobre Panama project went live this year, and it’s expected to add 40,000 ounces of gold to its annual production. Franco-Nevada’s roughly half-million gold equivalent ounces (GEOs), royalty agreements, and business diversification make it a unique gold mining stock.

US gold production

Investing in Gold

Gold can protect your portfolio from market volatility because it’s a relatively stable asset. Positions in gold typically perform well when investors aren’t confident in traditional currencies. Investors lose confidence when things aren’t going well.  Geopolitical tension, war, and poorly performing markets can all create uncertainties that may cause gold prices to rise. Ultimately, gold stocks can protect investors from economic uncertainty and volatility.

Gold prices rose 18% in 2019, marking the highest annual increase since 2010.  Low global interest rates and economic uncertainty helped fuel the rally. In fact, gold outperformed most short-term asset classes last year, and it even managed to post better returns than emerging markets. 

The outlook for gold stocks remains bright heading into 2020. Gold typically performs well during periods characterized by low-interest rates and uncertainty. Dovish central bank policy and lingering economic risks could support gold stocks for at least the next year.

Like Treasury bonds, gold is a safe haven asset, so traders often buy gold when they are worried about the global economy. The ongoing U.S.-China trade dispute, coronavirus outbreak, and other uncertainties could make gold more appealing.  Trade issues seem to be moving towards a resolution, but the Federal Reserve is taking a loose stance towards monetary policy and the coronavirus is still spreading throughout Asia. Combined, these uncertainties could support higher gold prices over the next few months. 

US Gold consumption

Industrial Use of Gold

Gold has more uses than you think. It’s an integral component of many sophisticated electronics, computing equipment, and high-end audio/video equipment. Gold also has a variety of industrial uses.

As a result, spot prices can be affected by the supply and demand for industrial-use gold. The vast majority of gold is held for value, but fluctuations in industrial demand for the element can have some effect on prices.

How To Get Exposure To Gold

Now, there are many ways you can gain exposure to the gold market. The first is buying physical bullion. However, most investors don’t really want to bother with storing and securing physical gold. Also, it’s harder to buy and trade than stocks.

You can also trade gold futures through your broker, but margins are relatively high. It’s not suitable for smaller trading accounts.

The easiest way to buy gold is through the stock market. The SPDR Gold Shares ETF (GLD) tracks the spot price of gold bullion.  It’s the most popular investment vehicle for most traders.

But if you’re looking for better returns, your best bet is in individual gold-related stocks.

Gold stocks come in a variety of flavors, including miners, junior miners, and developmental-stage gold miners. There are even a few gold miner penny stocks. However, these smaller companies tend to be uncertain investments.

Finding and extracting gold is not cheap, so you need to do your homework when screening for gold stocks. It takes time and money, so you want to look for firms that are well-capitalized and have little to no debt. Also, avoid companies that do the majority of their business in politically unstable countries.

Gold Stocks: Closing Thoughts

Market downturns are unpredictable, but the market will invariably turn bearish at some point. Buying gold stocks before the swoon begins is a prudent move for risk-minded investors. Gold stocks lower portfolio risk and protect against rising inflation. 

Gold stocks are an important part of any well-balanced portfolio. Miners offer a higher risk-reward ratio, but ETFs are a slower and steadier bet. Either approach can help you bunker down and protect your wealth. Gold stocks can even outperform the market during difficult times.

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Chris Dios is an American writer and entrepreneur based in the Greater NYC area.

1 COMMENT

  1. “State Street’s SPDR Gold fund is another great way to gain access to the price of gold.”

    Chris Dios, regarding your recommendation here, I’ve spent quite a bit of time doing my due diligence into GLD. Would you happen to know why there is a clause in the GLD prospectus that states GLD has no right to audit subcustodial gold holdings? The GLD managing organizations sure went out of their way to create this glaring audit loophole. What is the purpose of this loophole? Additionally, the GLD organizations promise that this fund is 100% backed by actual physical gold but yet they staunchly deny retail investors the right to any of their listed physical gold. I’ve also discovered a number of other issues along the way:

    “CNBC’s Bob Pisani also made a highly publicized visit to GLD’s gold vault in a segment called Gold Rush: The Mother Lode. GLD’s administration organized this visit to show that GLD’s gold actually exists. However, the gold bar held up by Mr. Pisani showed a serial number of ZJ6752 which did not show up on the latest bar list during that time. It was later found that this “GLD” bar actually belonged to ETF Securities.”

    “Did anyone try calling the GLD hotline at (866) 320 4053 in search of numerical details on GLD’s insurance? The prospectus vaguely states “The Custodian maintains insurance with regard to its business on such terms and conditions as it considers appropriate which does not cover the full amount of gold held in custody.” When I asked about how much of the gold was insured, the representative proceeded to act as if he didn’t know and said they were just the “marketing agent” for GLD. What kind of marketing agent would not know such basic information about a product they are marketing? It seems like they are deliberately hiding information from investors.”

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