Physical Gold vs. Gold Stocks: Comparing Gold Investments

Author: Focus on the User | 11 min read
Investing in physical gold versus gold stocks
Before you buy, compare the differences between physical gold and gold stocks.

Inflation is rising, countries are going bankrupt, and preparing for a market crash is becoming normal. Investing in physical gold or gold stocks is becoming popular for investors. We crack down on this answer and find out who rules.

Suppose you want to protect yourself against inflation or diversify your investment portfolio. In that case, one of the best things you can do is devote a portion of your portfolio to gold or other precious metals.

With that said, there are many ways you can go about doing this. You can invest in gold bullion or gold coins, or you can invest in gold mining stocks.

Table of Contents

  1. Gold’s Traditional Strength
  2. Gold & Stock Advantages and Disadvantages
  3. The Advantage of Gold Stocks
  4. Are Gold Stocks a Good Investment?
  5. The Disadvantages of Gold Stocks
  6. The Advantages of Physical Gold
  7. The Downside of Physical Gold
  8. Diversification is the Key
  9. Timing is Crucial When Investing in Either
  10. Is it Better to Buy Gold or Gold Stocks?

Both Gold, Just Not the Same

When talking about physical gold and mining stocks, there are some obvious similarities and even some unique differences. For one, physical gold is a smart way to hedge against inflation. In other words, whatever value your investment portfolio loses because of inflation, you can recover in terms of appreciation of your gold holdings.

Gold mining stocks have the potential to offer more growth compared to just gold. In many cases of a typical stock market bull run, it makes sense to focus more on stocks instead of precious metals. To clarify your overall strategy regarding gold mining stocks vs physical gold, you must first know your overall investment objectives.

Both Have Their Unique Benefits For Investors

Are you looking for your investment portfolio to grow substantially over a short time or primarily for a hedge? Similarly, if you are considering getting into gold, why are you doing so? Are you looking to grow the value of the gold portion of your investment portfolio, or are you looking for a hedge against inflation or a market crash? Keep the following question in mind. Know your investment objectives: Growth or hedge.

Gold’s Traditional Strength

One thing is clear when it comes to determining the value of investing in either stocks or gold. Gold has specific traditional strengths that both these investment forms share. That's right, mining stocks and physical gold share these particular strengths.

Gold's traditional strengths are not going to change. Gold's strengths are a traditional store of value, liquidity and refuge in times of economic uncertainty. Moreover, gold has a strong industrial demand and is often used for jewelry. These traditional strengths of gold never changed. Both types of gold have this common core of strength.

Now that we've established this traditional strength, particular features are attractive to gold mining stocks that are not present in physical gold and vice versa.

Gold & Stock Advantages and Disadvantages

Physical GoldGold Stocks
Advantages

  • Stable investment
  • Gold use for Retirement Fund
    • (Ie. IRA, SIPP)
Advantages

  • Appreciating like stocks
  • Possibility for quicker return/loss
Disadvantages

  • Affected when stocks strengthen
Disadvantages

  • Risky
  • Potential for loss of capital
Investing in gold mining stocks

The Advantage of Gold Stocks

Are Gold Stocks a Good Investment?

Gold stocks are not physical gold. When you invest in a gold stock, you're not buying a position in physical gold, bullion, or gold coins. The benefit is quick gains if these mining stocks do well. Physical gold is better suited for long, secure investments.

Keep in mind you are investing in miners. When investing in gold mining stocks, you are investing in equities. In other words, you are investing in stocks. You are investing in particular companies.

You are betting that they are well managed compared to other companies in their industry. If you make the wrong bet, your investment isn't going to appreciate much. Why? You aren't investing in the health of the gold market or gold in general. You have, instead, invested in the health of one particular company.

Is a Gold ETF better than physical gold?

The big advantage of gold stocks/ETFs is that they appreciate like stocks. So if there is a big run-up in stock values driven by either an increase in gold prices or market shocks, gold mining stocks go up. These stocks appreciate like stocks, so the appreciation can be pretty significant.

Can I get physical gold from gold ETF?

However, they are still stocks. And this is why many investors who want to make 'pure gold plays' get cold feet with gold miners. Regular company stocks appreciate in value partly due to their performance and partly due to the performance of other stocks in their industry, as well as based on the health of the stock market in general. There are so many other extra considerations to keep in mind.

Suited For Investors Looking for Quick Gains With Potential Losses

Compare this to betting strictly on pure gold. If you pick the right mining stocks, they might appreciate much faster than other stocks and even gold metal prices.

The Disadvantages of Gold Stocks

Are gold ETFs safe?

The problem with investing in gold stocks/ETFs is that while gold shares tend to go up due to market sentiment, you still have to pick the right stocks. If an impending market crash, market shocks, or inflation picks up, gold mining shares go up.

However, suppose you want to place a bet on gold mining shares that will continue to increase and produce the best return on investment. In that case, you have to play this investment the same way you would general stocks. You still have to pick the right stocks.

It makes a lot of sense to employ tried and proven stock selection methods like picking out dominant market players, selecting based on price earnings and analyzing the news. In other words, you have to use the same analysis you would use when picking out shares of stock.

Selecting based on stocks could be a disadvantage because even if you use these analytical tools, you're not as sure you are picking the right stock.

Suppose stock investment was just a function of looking at a broad range of data points and picking the shares that meet those data points. In that case, there will be many more millionaires playing wall street than we have now.

The reality is that data can only take stock picks so far. There is still a market, and the market operates within its own rules and has its trends.

It's anyone's guess which gold mining investments are worth it in the long hall. Suppose you employ traditional stock picking techniques for picking out gold mining stocks. In that case, your chances of making the right play are higher than if you just randomly chose stocks.

Investing in physical gold

The Advantages of Physical Gold

Physical gold is very liquid. That's not much of an advantage because gold mining stocks are also liquid. However, the great thing about physical gold is that it reflects the market's sentiment against economic downturns much faster than gold mining stocks.

Gold mining stocks, while engaged in the business of gold, are valued differently. Gold miners are very different from each other. Gold mining companies differ in terms of overall company health, personnel, industry, and specific gold mines they are mining.

There are so many variables among gold mining stocks that the only thing they have in common is that they are all involved in getting physical gold out of the earth.

Gold is a metal that provides security. Gold stocks, on the other hand, can be a way to diversify your portfolio into gold without investing in the metal itself. Investors buy gold stocks to invest in gold while taking on the risk of a stock.

You don't have this variability when you are investing in physical gold. The appreciation of physical gold is more stable, more constant, and it's across the board. You're dealing in physical gold. Gold prices are the same the world over.

One borrowed piece of gold is the same as borrowed gold on the other side of the planet. Compare this with investing in gold mining stocks or gold coins. There are other sources of value variation that you cannot control and cannot account for.

Suppose you want to maximize the peace of mind regarding the value of your gold investment. In that case, investing in physical gold is a good idea.

Physical gold is an excellent hedge against market trends. It's a better hedge than gold mining stocks because the reaction you get in gold prices is clearer and more decisive when investing in physical gold.

For those interested in investing in physical precious metals over stocks, we recommend you look at our list of the top dealers in the industry. This top dealer list covers options for investing through your retirement or other means.

The Downside of Physical Gold

The downside of physical gold is that, just like other direct gold investments, it tends to get left behind when the equities market improves. When inflation lowers, or the stock market zooms to a new record, the price of physical gold generally, not as an iron rule, tends to go down.

If you have poor market timing skills or you tend to have a buy-and-hold strategy, you might get left in the dust when the market improves. You might end up holding on to physical gold for too long. The great thing about gold mining stocks is that they might be able to retain their value for longer compared to physical gold.

Given the right market conditions, they can go up in value faster than actual physical gold. Physical gold is like taking the temperature of the overall global economy. It can go up and down very quickly. Gold mining stocks, based on other variation features, can take their time to reflect market conditions.

As a result, you were given enough leeway in terms of valuation. You don't necessarily get this with physical gold. Physical gold tends to zoom up and down very quickly.

Diversification is the Key

If you want to lock in on gold's value for your investment portfolio, it's a great idea to diversify. Not only do you diversify in terms of adding precious metals to your overall investment portfolio, but you also diversify in your positions of gold.

You can diversify your precious metals by investing in silver, platinum, palladium, and gold. However, you can add another layer of diversification by buying gold stocks, silver mining stocks and platinum mining stocks.

In other words, you can turn investment differences to your advantage because, as mentioned above, these different forms of investing in gold or precious metals have advantages and disadvantages. You can use this diversification as a hedge and make money through the differences.

Timing is Crucial When Investing in Either

If you want to leverage the advantages of gold, timing is crucial. You must know when to hold this precious metal in a particular form.

You have to know when to buy physical gold and unload physical gold. You have to know when to buy gold stocks and when to liquidate your positions. As mentioned above, you might hold on for a long time if you are looking to use a buy-and-hold strategy for physical gold.

You might put yourself in a position where the stock market has completely recovered and vaporized the gold appreciation value of your holdings. You might still be hanging on to physical gold. Consider physical gold versus the stock market to understand their investment differences better. You must remember that you have to hold your investments in varying forms and that these different forms are a form of diversification.

You have to be ready, willing, and able to change the forms of your investments. Not only to preserve their overall value but also to position yourself to make money on the upswings.

Diversification only works if you time it correctly. If you hang on to a particular form of investment and hang on for a long time, you're not diversifying.

You might be opening yourself up to all sorts of investment risks. You have to time the form of your diversification strategies correctly. If investors were very good at timing their entries and exits with certain investment positions, most investors would do quite well in the market.

Is it Better to Buy Gold or Gold Stocks?

During an economic downturn, it is risky investing only in stocks. Gold performs better when the stock market is losing value. This trend has been the case in past recessions. Gold is a hedge against inflation and is used as security against a downturn.

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