How To Invest In Gold Stocks

How To Invest In Gold Stocks

Published: March 16, 2022
Updated: May 03, 2022
Table Of Contents:

There are several ways to invest in gold. One of the many strategies is buying gold mining stocks, which are traded on public exchanges.

How To Start Investing In Gold

A common rule of thumb is to allocate 5% of your investment portfolio to gold. This helps diversify a portfolio. Once you know how much gold you would like to buy, the next step is to decide what form of gold you will invest in.

Gold investors have three distinct options to choose from: gold bullion, gold ETFs, or gold stocks. Each of the gold investing options has its own strengths and weaknesses:

  • Physical gold (bullion) offers the most security and peace of mind, but comes with storage costs.
  • Gold exchange-traded funds (ETFs) are very convenient, but come with added fees.
  • Gold stocks tend to have the greatest upside among gold investments, but also carry the greatest risk.

This article will focus specifically on gold stocks. For more context about investing in gold in general, you can read our Beginner's Guide to Investing in Gold.

What Is a Gold Stock?

Gold itself is a commodity, whereas gold mining companies (i.e. gold stocks) are in the business of gold production. This means publicly-traded gold stocks are correlated with the changes in the gold price. This is to say that when the price of gold is volatile, gold mining stocks can be volatile too.

However, the ability for gold mining companies to be successful relies on their businesses generating positive and consistent earnings. Investors can add exposure to precious metals to their portfolios by buying shares of companies that deal in gold exploration and mining.

Gold Miner

Gold Miner

3 Gold Stocks to Consider

Gold stocks are a great way to get exposure to the benefits of the yellow precious metal. It’s important to know that buying gold stocks does not mean you are buying gold, rather, you are buying shares of a publicly-traded company whose revenues are based off of gold operations. Here are some of the top miners to consider.

1. Barrick Gold Corp. (GOLD)

Barrick Gold is one of the world’s leading gold producers with mine operations in north and south America and a stock price of roughly $23. The Canadian-based company has a market cap of $41 billion, and the stock is up more than 20% year-to-date. The company exhibits a positive track record since it has delivered production in line with guidance for three consecutive years all while working under challenges brought by COVID-19.

The industry has been dealing with higher costs of operations due to inflation, but GOLD has been able to manage this challenge well with consistent operating performance. Furthermore, the mining company continues to build on its exploration and new mining projects.

Gold mining can pose environmental concerns and can have a negative impact in the communities it performs its operations in. If this is a concern for you as an investor, Barrick focuses on sustainability when it makes business decisions such as creating economic benefits for local communities and minimizing the environmental impacts of mining by minimizing energy and water usage. Overall, Barrick is known within the industry to provide top quality assets. The company is well-positioned to continue growth in the future.

barrick cortez mine nevada

Barrick Gold's Cortez Mine in Nevada

2. Newmont Corporation (NEM)

Another big name in the industry is Newmont Corp. Newmont is the largest gold reserve base in the industry with a global operations and diversified projects in Argentina, Australia, Canada, Ghana, Mexico and the U.S. It has a market cap of about $53 billion and a market value of roughly $67 which is up 9% year-to-date. Unlike investing in gold coins, NEM stock has a competitive dividend yield of 3.25%, an attractive feature for income-seeking investors. Newmont Corp. is on track to deliver attributable gold production of 6 million ounces at a cost of $1,050 per ounce. Furthermore, the company has generated $1.7 billion in attributed cash flow and more than $250 million of non-core asset sales through the third quarter of 2021 and is on track to return $1.7 billion to shareholders through dividends.

3. Franco-Nevada Corporation (FNV)

Franco-Nevada is a leading gold royalty and streaming company. This means, they give mining companies loans and receive a portion of the revenue the mine generates along with a percentage of interest in a mine. FNV aims to be the go-to stock for the individual investor since it offers exposure to gold, offers a dividend yield of 0.87%, has a strong balance sheet and prioritizes ESG principles in its corporate practices. The gold company is a large cap with a market cap of $28 billion. It’s stock is currently priced around $147 and is up 32% year-over-year. According to the company, FNV’s share price has outperformed all gold equity benchmarks in compound average annual total return since its inception. The company manages a diversified portfolio of precious metals including gold, silver and platinum.

3 Factors to Look At When Investing in Gold Stocks

If you are new to investing in gold stocks, here are some of the factors you need to know when doing your due diligence on a gold stock investment.

Earnings

When investing in gold stocks, it is important to look at the company’s financials. This data can usually be found on a publicly-traded company’s website. In your initial research, you should ask yourself, does the company have a historical track record of generating consistent earnings year over year and quarter over quarter? If the answer is yes, this is a good sign that the company has a proven business model, strong management team and is a competitor among its peers.

On the other hand, if the company has mixed earnings, you need to dig into the company’s financials to understand where the gap is. If a company had a less than average quarter along with its industry peers, maybe this isn’t a sign of major concern, however, if a company’s earnings results were well below expectations, there could be a core issue.

Balance Sheet

Another important question to ask is, does the gold company carry too much debt? It’s normal for companies to have debt as they might be investing in product development or a new project. But if the company is over leveraged, it may exhibit an inability to grow, could pose a long-term systemic business issue, or maybe even be in jeopardy of default.

Price/Earnings Ratio

The price/earning ratio is a quick and easy metric to use to evaluate whether you are buying a gold stock at a good share price. When investing in gold stocks, you want to find companies that are growing at attractive valuations. The P/E ratio measures a company’s market value based on its earnings. A gold stock with a P/E ratio of 10, for example, means the stock is trading at 10 times its earnings. Typically, a lower P/E ratio is said to be more attractively valued than a gold stock with a higher P/E ratio

3 Benefits of Investing in Gold Stocks

1. Gold Stocks Offer a Convenient Way to Invest in Gold

Investing in gold stocks is a convenient way to get exposure to the precious metal. There are several things to consider when managing physical gold such as the extra cost of storage, insurance and transportation. The gold market of stocks offers a more cost-effective way of investing in gold.

2. Gold Stocks Can Provide Returns Even If the Price of Gold is Down

Also, when investing in publicly-traded companies in the gold industry, you are both benefiting from gold price increases in combination with a potential rise in a company’s share price and dividend payments, if the company pays out a dividend. Even if gold prices are stagnant, a gold company with a long and reputable track record can be dependable in delivering strong returns to its shareholders.

3. Gold Stocks are Liquid Assets

Gold stocks are liquid investments. This means investors are able to easily go in and out of gold stock positions by buying or selling them on the stock market. This is a great option for day traders or self-directed investors who need to adjust their portfolio positions. Physical gold is a non liquid asset. It’s not easily bought and sold. Rather, physical gold requires a commitment to hold it long-term and may have a larger cost to begin with.

Stack of gold coins with arrows

Stack of gold coins with arrows

Investing Risk: Gold Stocks Can Be Volatile

The risk for gold stock investors to be aware of is that in the short-term, stocks can have price fluctuations. This is the nature of the stock market and is not independent of gold stocks. Over the long-run however, the value of gold stocks is supposed to increase. Despite this, you must consider volatility when investing in a gold publicly-traded company.

A key reminder here is you are not investing in physical gold, rather you are investing in gold mining or royalty companies. This means investors have exposure to both the price changes in gold the commodity as well as stock market volatility, which impact gold stock prices. This is why you must do your research to find the highest quality gold companies that have the ability to produce consistent profits in the future.

Investing in Gold Stocks vs Other Gold Buying Options

Investing in gold stocks is one of many options to get exposure to the benefits of gold. Buying physical gold coins or bullion is different from buying gold stocks and investors need to understand the benefits and risks associated with these different gold investing strategies.

Unlike investing directly in gold bullion, which doesn’t provide any earnings, investing gold stocks provides investors with dividends, which can be seen as a form of income. If you are interested in getting started with investing in gold stocks, keep in mind the characteristics of what a successful publicly-traded gold company should look like with the long-term in mind.

Written by Paulina Likos


Read more about the different ways to invest in gold from the expert authors at Gainesville Coins:

How To Invest in Gold For Beginners

Investing in Gold vs. Silver

Is Silver a Good Investment in 2022?

Investing in Gold: What You Need to Know

How to Invest in Gold ETFs

How to Buy Gold Bars: Buyer's Guide

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