Is Buying Stocks of Gold a Good Investment?
Posted on February 15, 2021
Investing in stocks of gold can be a good way to diversify your portfolio. However, like any investment, it comes with its own set of risks. With a little research, it will be easier to decide whether or not trading stocks of gold is the right financial strategy for you.
What Types of Gold Stocks Are Available?
Here are two of the most popular options you can use to stake your claim in the world of gold stocks:
- Exchange-traded funds (ETFs): An ETF is a collection of assets that you can trade much like stocks. You can invest in an ETF that uses gold as its main asset, which allows you to buy multiple stocks without having to purchase each one individually.
- Gold mining stocks: You can also purchase stocks in individual gold mining companies. When a mining company does well, so does your return on investment, but this is often a high-risk investment. Whatever negative situation that mining company finds itself in could very likely bring down the value of its stock. These situations could include worker strikes, safety issues or national disasters.
What Are the Key Criticisms of Gold Stocks?
Every investment has criticisms and potential risks. It's up to you as the investor to decide if you're willing to incur those risks. Here are a few reasons why many investors turn away from investing in stocks of gold:
Politics
Politics play a large part in gold stocks. Remember that you're not just investing in the price of gold when you buy stocks. You are also investing in the companies that mine the gold.
If you invest in the stock of a mining company in a turbulent country, you run the risk of losing your investments if that company's operations are halted for some reason. This can happen for many reasons, such as government nationalization of mining companies, electricity loss, warfare and more. If you invest in a mining company's stock, try to stick with one in a more well-established region.
You Own the Idea of Gold
When you invest in gold stocks, you simply own the idea of gold rather than gold itself. Anything can happen to those stocks, potentially leaving you with significantly less wealth than before.
This is one of the main reasons many investors choose to buy actual gold. Though the value of gold fluctuates much like gold stocks, if something should happen, you will still have real, tangible wealth. In the event of an economic crisis, you would be able to use real gold as currency, but your stocks could disappear entirely. To put the power of tangible gold in perspective:
- Stocks have been around since 1611 when the Dutch East India Company offered the world's first-ever publicly traded stock.
- Gold has been a valuable commodity for thousands of years, withstanding the test of time.
Ties to the Stock Market
Though gold prices and gold stock prices often rise and fall together, this isn't always the case. Sometimes, gold stocks can fall while gold prices stay high. This is because gold stocks often reflect how the rest of the stock market is performing. A gold mine that has been driving stocks of gold up can become unpredictable or defunct, sending those stocks back down. Meanwhile, physical gold may still retain its value.
How Have Gold Stocks Performed?
Gold stocks are currently in the middle of a bull market. In fact, gold stocks hit record highs in the second half of 2020. Those who invested in gold stocks in 2018 or earlier are benefiting from this bull market, and many investors are jumping aboard this train in an attempt to reap the same benefits.
So, what's the cause of these record-breaking highs for gold stocks? It's in large part due to the fact that the United States dollar is worth less than it has been in years. [1] Gold stock value has historically had an inverse relationship with the U.S. dollar, which means that as the dollar regains strength, gold stock prices will likely go back down.
One of the reasons for this inverse relationship is that people lose faith in the dollar when it's weak and start investing more in tried-and-true gold. If this relationship between the dollar and gold stocks feels too volatile to take part in, you might be the kind of investor who buys physical gold instead. That way, you will have something to show for your money regardless of how the stock market is fluctuating.
What Does the Outlook Look Like for Gold Stocks?
The current rise in gold stock value is tied to COVID-19. Gold stocks rose as the U.S. dollar cheapened and the country had to borrow money to bolster the economy. [1] However, gold stocks experienced a sharp fall when Russia said it approved the first vaccination for COVID-19 on August 11, 2020. [2] Some analysts believe that as economies recuperate from shutdowns and weak currencies, the value of gold stocks will fall. Others believe that gold stock will continue to rise for a year or two before tapering off.
Buying gold stock can be a good investment, but you have to be willing to accept the risks. One of the arguments for owning gold rather than buying stock in gold is that when gold stocks are rising, the price of real gold often follows suit.
This means that the price of real gold can rise with the value of gold stocks. However, if they both plummet, the investor with real gold will still have tangible wealth, and they can wait for prices to rise again in order to sell it for a higher profit.
Investing in stocks of gold may be a good way to diversify a portfolio for some investors. However, for those who want more security, owning actual gold may be a smarter decision. As stock prices rise and inevitably fall again, gold bullion is always gold bullion.
Article sources:
1. Newsweek. 'Why Is Gold Going Up?' https://www.newsweek.com/gold-price-increase-dollar-money-investment-economy-1520717. Accessed Sept. 3, 2020.
2. Investor's Business Daily. 'Gold Stocks: What's Next After Gold Falls On Fed Disappointment,' https://www.investors.com/research/gold-stocks-investing-price/. Accessed Sept. 3, 2020.
