You’ve likely heard you can invest in physical gold on TV commercials that try to get you to buy gold coins. But did you know you can invest in gold stocks as well?
Gold stocks aren’t a perfect replacement for owning physical gold. Even so, this method of investing in gold might be a smarter option for you if its advantages outweigh the disadvantages based on your situation and personal finance goals.
Here’s what you need to know about investing in gold stocks and a few specific stocks you might consider.
3 reasons you might invest in gold
You might want to invest in gold for a single reason or several reasons. Ultimately, your reasoning should focus on how investing in gold could help you potentially get closer to your financial goals. Here are three ways gold might make a smart addition to your portfolio.
It’s a precious metal in limited supply
Gold is one of many precious metals that has a limited supply. The gold we have on the planet today is all of the gold we’ll ever have. This limited supply provides a scarcity factor that could help drive up the price of gold in the future.
It could help diversify your portfolio
Gold is a physical asset that has unique characteristics that determine its pricing. Historically, gold has held value due to those characteristics and the fact it could be used to make jewelry or coins. Today, gold is used in many electronic applications, as well. Historically, gold prices do not always follow the movements or volatility of other investments, such as the stock market. If you're investigating how to diversify your portfolio, assets like gold could be useful to help spread your risk of loss.
It isn’t tied to the U.S. dollar
When the U.S. used the gold standard, the U.S. dollar had gold in a vault to back the dollar’s value. Today, the same relationship does not hold because the gold standard was abolished. Because the two are no longer tied together, gold may maintain its value even if the U.S. dollar decreases in value. This is not guaranteed but could be possible.
What to know before you invest in gold stocks
Before you invest in gold, you should understand the basics of how to buy gold and the options you have available to you. Although you likely know about the types of physical gold you can invest in — such as gold jewelry or gold bullion as coins and bars — the types of gold stocks and exchange-traded funds (ETFs) available may be more unfamiliar.
Gold stocks represent owning portions of companies involved with gold in some way. With individual stocks that could be a single company. With ETFs, you might end up owning shares in numerous companies. Typically, gold stocks and ETFs are easier to buy and sell, which means they have more liquidity than physical gold. This could be an advantage depending on your investing goals.
Gold stocks can include the following types of companies:
- Mining companies: Gold production companies are those that mine gold, and potentially other minerals, from the ground.
- Royalty companies: These companies pay an upfront fee to mining companies in exchange for a portion of the revenues. These are also sometimes known as streaming companies.
Gold ETFs are funds that hold gold investments either in several gold-related companies or actual physical gold:
- Physical gold ETFs: ETFs that purchase and hold physical gold so you don’t have to deal with storage and transactional issues.
- Gold stock ETFs: ETFs that purchase stocks related to the gold process, such as gold mining stocks or gold royalty stocks.
7 gold stocks or ETFs you could invest in
The smartest gold stocks for you to invest in will depend on your situation, goals, and risk tolerance, but here are a few options you might consider as you make your stock picks. To make these selections, we first researched the major companies and funds in the space. Then, we tried to pick at least one option representing each of the types of gold stocks and ETFs defined above.
As you contemplate which gold stock or ETF might be right for you, keep the following terminology in mind:
- Market capitalization (market cap): The value of the total number of a company’s shares multiplied by the share price
- Price-to-earnings ratio: The stock’s price divided by its earnings per share
- Earnings per share: A company’s profit divided by its number of outstanding shares of stock
- Expense ratio: The administrative and operating expenses of the fund divided by the average value of the assets the fund holds — a lower number represents lower expenses
- Total annual returns: A standardized way to measure annual returns over time
You don’t have to understand all the nuances of these metrics, but comparing them can sometimes reveal information that might be important to your decision making.
Barrick Gold (GOLD)
- Market cap: $33.8 billion
- Price-to-earnings: 17.06
- Earnings per share: $1.11
Barrick Gold, founded in 1983, is one of many gold mining companies you could invest in. This gold producer also mines copper and explores for other precious metals. The company is headquartered in Canada and has almost 22,000 employees.
- Market cap: $26.44 billion
- Price-to-earnings ratio: 38.46
- Earnings per share: $3.60
Franco-Nevada, founded in 2007, is a company that earns revenue from gold royalties. The company aims to limit the risk investors might face compared with if they directly invested in mining companies. Franco-Nevada is a Canadian company and has just 40 employees.
- Market cap: $49.5 billion
- Price-to-earnings ratio: 24.45
- Earnings per share: $2.54
Newmont, founded in 1921, is a gold mining operation. It operates gold mines in Africa, Australia, North America, and South America. The company is headquartered in Colorado and has roughly 28,000 employees.
VanEck Vectors Gold Miners ETF (GDX)
- Five-year average annual total returns: 9.48%
- Expense ratio: .51%
VanEck Vector Gold Miners ETF is an exchange-traded fund that focuses on gold mining stocks. It attempts to replicate the NYSE Arca Gold Miners index. This index intends to track the overall performance of companies involved in gold mining.
This ETF’s top holdings include:
- Newmont Corp (NEM)
- Barrick Gold (GOLD)
- Franco-Nevada (FNV)
- Wheaton Precious Metals (WPM)
SPDR Gold Shares (GLD)
- Five-year average annual total returns: 8.47%
- Expense ratio: .40%
SPR Gold Shares is an ETF that is physically backed by gold. This means it holds $1 in physical gold for each $1 in market capitalization of the ETF. The ETF is the largest gold fund of its type in the world. The expense ratio is notably higher than some of its smaller competitors, though.
iShares Gold Trust (IAU)
- Five-year average annual total returns: 8.63%.
- Expense ratio: 0.25%
The iShares Gold Trust exchange-traded fund is another ETF physically backed by gold. This one is smaller than GLD, but also offers a lower expense ratio.
U.S. Global GO GOLD and Precious Metal Miners ETF (GOAU)
- Three-year average annual total returns: 23.91%
- Expense ratio: .60%
The U.S. Global GO GOLD and Precious Metal Miners ETF takes investing in precious metals a step further by including multiple metals rather than just gold. The fund invests in both miners and royalty-based stocks.
Its top holdings include:
- Royal Gold (RGLD)
- Wheaton Precious Metals (WPM)
- Franco-Nevada (FNV)
- Sandstorm Gold (SAND)
The fund was founded in June 2017, so it doesn’t have a five-year average annual total returns as of this writing.
How to get started investing in gold stocks
If you’re ready to start investing in gold stocks, the process is straightforward.
First, you need to open and fund a brokerage account that allows you to buy the investments you’re interested in. Many brokerage firms will enable you to buy stocks and ETFs, but some do not allow both. Ideally, people who want to invest in gold stocks should look for a brokerage firm or app that lets you choose individual investments rather than a prebuilt portfolio like many robo-advisors offer.
You can view our list of the best brokerage accounts if you prefer to invest with more traditional brokerage firms. Alternatively, check our picks for the best investment apps if you’re looking for a more modern approach to investing.
Once you’ve chosen an account and added funds, buying a gold stock or ETF is as easy as placing an order. Before you invest, make sure you understand any risks involved and do the proper research so you choose the best gold stock for your goals.
You may want to limit your gold stocks to a certain percentage of your portfolio to remain adequately diversified, especially as you are learning more about this particular asset class.
Other ways to invest in gold
You have other alternatives if you don’t feel gold stocks or ETFs are a good fit for you. These could include physical gold, a gold IRA, or a gold mutual fund.
Physical gold investments are relatively easy to make but come with some significant downsides. Some common ways to purchase this commodity include coins, bars, and jewelry. Unfortunately, you usually have to pay a markup when you buy the gold and sell it to a dealer at a discount to liquidate your gold. You also have to securely store the gold, which could cost money if you use an option such as a safe deposit box.
Some people want to own physical gold in a tax-advantaged manner. A gold IRA could provide this option. A traditional gold individual retirement account allows you to contribute money to the account on a pre-tax basis. This means you don’t pay any taxes on the contributions. You will have to pay taxes on the withdrawals in retirement.
If you want the IRA tax advantages, you aren’t allowed to hold the physical gold yourself according to IRS regulations. Gold IRAs must be established with a specialized IRA custodian that holds the physical gold for you on your behalf. These companies might charge significant fees for this service.
Gold mutual funds
Finally, gold mutual funds are similar to gold ETFs but are structured slightly differently. Mutual funds only trade once per day at the close of business and usually come with higher fees than ETFs. They may make more sense in some situations based on your preferences, though.
Are gold stocks a good investment right now?
Investing in gold might be a suitable choice if you’ve thoroughly researched the stocks you want to invest in and you believe they can help you reach your investing goals. Historical returns could give you an idea of what to expect based on your assumptions, but it’s important to remember that past performance does not guarantee future returns. Investing is inherently risky, including investing in gold stocks, so be prepared for the potential losses that could occur.
Is it better to buy gold or gold stocks?
Choosing between investing in physical gold or gold stocks depends on your goals for your investments. People who want to take advantage of the benefits of owning physical gold may prefer this option as long as they can handle the storage, security, and transactional issues. Others may decide investing in gold stocks allows them to gain the financial returns associated with gold without the risks of physical ownership.
What gold stocks pay dividends?
Several gold stocks pay dividends, including:
- Franco-Nevada (FNV)
- Barrick Gold (GOLD)
- Newmont Mining (NEM)
- Sibanye Gold (SBGL
- Royal Gold (RGLD)
Many others also pay dividends. Before you invest in any gold stocks that pay dividends, make sure they fit your investment goals and you understand the risks involved.
You may decide investing money in gold stocks with at least a part of your portfolio may help you meet your diversification goals. Other people might feel that investing in physical gold or another asset class altogether is a better decision for them.
No matter which investment you choose, make sure you properly research the investment to understand how it works, how it fits in with your investing goals, and the risks you face in owning the investment.
All rates and fees are accurate as of Jan. 2, 2022