Since 2001, the price of gold has moved from $265 an ounce to over $1,300 in 2017. That’s a cumulative return of over 390%.
Gold has been recognized as a currency for thousands of years. It has a universally recognized value, viewed as a hedge against inflation, and adds diversification to a portfolio consisting of stocks and bonds.
However, at these current prices buying physical gold is out of the question for small investors. Also, if you do decide to amass a large portfolio of gold bullion and coins security and storage become a concern. Trading futures is also not really an option for small investors because it requires active monitoring and high maintenance margin requirements.
Investing in stocks that gave you exposure to gold is faster, easier, and potentially more profitable than buying physical gold.
Many “gold bugs” will argue that the only way to invest in gold is by buying the physical product. They argue if Armageddon comes, paper assets and fiat currencies will get destroyed. However, at this point, our financial system is too big to fail. Everyone is in the market, central banks all the way down to individual 401K plans are participating in a multi-trillion dollar market place.
That doesn’t mean we won’t have market corrections or asset bubbles emerging in the future. But believe it or not, historically owning gold stocks has been safer than owning gold bullion.
Fun fact. The U.S., made it illegal for citizens to own gold from 1933 to 1975. Now, ask yourself, when was the last time it was illegal to invest in the stock market.
Here are five different ways you can invest in gold through the stock market.
Stocks That Track Gold
Gold ETFs are slightly different than stocks but they are traded the same way. A gold ETF invests in the underlying asset. For example, SPDR Gold Shares (NYSE: GLD) is an ETF that seeks to replicate the performance of the price of gold bullion, net of its expenses. The net expense ratio for GLD is 0.40%.
The ETF invests in gold bullion, holding over 26M ounces . The structure of the ETF allows for baskets to be created and redeemed according to market demand, creating liquidity.
The barrier of entry is relatively low when compared to buying an ounce of gold bullion. The price of an ounce of gold is 10 times more expensive than buying one share of GLD.
From a liquidity standpoint, shares of GLD are actively traded, making for seamless execution and minimal slippage.
iShares Gold Trust (NYSE: IAU): is an ETF that buys and holds gold. It holds over 7M ounces of gold, and has net expense ratio of 0.25%
What makes this ETF appealing is its price. An ounce of gold is more than 100 times more expensive than one share of IAU.
No surprise that it’s also the most actively traded gold ETF in the market today.
Royalty and Streaming Companies
A royalty and streaming company does not operate any mines, develop projects or conduct exploration. Instead, they act more like a financier that injects capital to mining companies so they can explore and produce gold.
This is a free cash flow business. It receives royalties on what the mining company produces. The there are two main types of royalties: revenue-based royalties and profit-based interest royalties.
A revenue-based royalty is derived from the value of gold production from a given project. A profit-based interest royalty is derived from the operating profit as defined by its contract.
Streams are metal purchase agreements that provide, in exchange for an upfront deposit, the right to purchase all or a portion of gold produced from a mine at a predetermined time.
Royalty and streaming companies typically have limited exposure to capital costs and other operating costs.
Franco-Nevada Corporation (NYSE: FNV): Recognized for having the largest and most diversified portfolio of assets among royalty and streaming companies.
The firm has over $1B available capital and is debt free. Its current mineral assets include: 47 producing, 40 advancing, and 173 exploration.
Source: Franco Nevada
For over a decade, Franco Nevada has seen its shares outperform that of gold. The firm has a market cap exceeding $14B and offers investors an annual dividend of $0.92.
Senior Gold Mining Companies
Also known as major mining or large producing companies. These corporations have a large market cap, and are involved in mining, producing, and developing mineral deposits. They are at a point in which they’re earning cash flow from their operations.
Newmont Mining Corporation (NYSE: NEM): Recognized as the only publicly traded gold producer in the S&P 500. The firm has had a rich history spanning more than a century of being in business.
As of December 31, 2016, Newmont had proven and probable gold reserves of 68.5 million ounces and an aggregate land position of approximately 23,000 square miles.
The firm has a market cap that exceeds $20B, and offers investors an annual dividend of $0.30.
Junior Mining Companies
A junior mining company is one that has yet to produce nor receive significant income from gold production. Their business primarily consists of exploring for new gold deposits.
Since many of these companies are not producing substantial revenue from producing gold, capital can be an issue for them.
When gold prices are bullish, junior gold mining companies tend outperform senior gold mining companies. On the other hand, when gold is in a bear market, junior gold miners significantly underperform senior miners.
Seabridge Gold Inc. (NYSE: SA): A developmental stage company. It works with subsidiaries, engaging in the acquisition and exploration of gold properties in North America.
The firm has 100% ownership in Kerr-Sulphurets-Mitchell property and Courageous Lake. KSM has proven and probable reserves that consist of 38.8M ounces of gold. Courageous Lake has proven and probable reserves that consist of 6.5M ounces of gold.
As of November 2017, Seabridge had $20M in working capital and had zero debt.
Gold Mining ETFs
If you’re unsure on which gold mining company is best for you, consider a gold mining ETF. For example, the VanEck Vectors Junior Gold Miners ETF (NYSE: GDXJ) invests in a basket of junior mining companies. Some of its top holdings include: Gold Fields Ltd., Yamana Gold Inc, Kirkland Lake Gold Ltd, Evolution Mining Ltd., and Iamgold Corp.
For those investors considering senior gold miners, consider the VanEck Vectors Gold Miners ETF (NYSE:GDX). Some if its top holdings consist of Newmont Mining Corp, Barrick Gold Corp, Franco-Nevada Corp, Newcrest Mining Ltd, and Agnico Eagle Mines Ltd.
Final Word
There are several ways an investor can gain exposure to the gold market without actually owning the physical metal. Some of these investments could even outperform physical gold.
ETFs that track gold are the simplest and easiest way. The barrier of entry is low. As mentioned, one ounce of gold bullion is more than 100 times richer than one share of the iShares Gold Trust (NYSE: IAU).
Royalty and streaming companies offer attractive opportunities for investors. They have limited exposure to capital costs and other operating costs. A free cash flow business that has the potential to outperform physical gold.
Senior gold miners and junior miners are yet another option an investor can choose from. As well as, gold mining ETFs.
Gold bugs will argue that there is only way to invest in gold and that is through bullion purchases. However, as we’ve seen, you have several viable options to select from.
