Gold stocks as an investment can offer several advantages compared to gold coins or gold bullion. For many investors gold stocks may be the best way to add gold to your portfolio so that you can benefit from its hedging and diversification effects. Below we will talk about several reasons you should consider adding gold stocks to your portfolio.
Stock Dividends
Many gold companies, such as miners and royalty companies, will pay a dividend to their shareholders. When you invest in physical gold via gold coins or gold bullion, you can only benefit from price appreciation. Warren Buffet has famously called gold a pet rock, because physical gold as an investment doesn’t do anything, it just sits in a gold vault. But when you invest in gold companies you are putting money to work in an ongoing business. Even if the gold price declines, some gold companies may still be profitable and pay a dividend.
A higher gold price benefits gold stock investors
If the gold price increases, then gold stocks will benefit also. A higher gold price means higer sales for gold companys. If expenses remain stable, meaning the company’s cost to produce or acquire the gold remains equal, then higher gold prices will mean increased profits. These increased profits can either be paid to shareholders in the form of dividends or reinvested in the business on their behalf. Either way gold stock investors will benefit from an increasing gold price.
Operating Leverage
Gold companies have greater access to capital than individual investors, this means they can borrow money and invest it on behalf of their shareholders. When used correctly, operating leverage can increase the company’s margins and thus returns to shareholders. But be careful! Increasing leverage also increases risk. If the company overuses leverage, and is unable to pay back the money it borrowed, then margins could shrink or the company may lose money. Too much leverage decrease the chances stockholders will be paid the divided discussed above.
Gold stocks are less expensive to hold
Holding physical gold can be expensive, sometimes up to several percentage points per year. Over a long time frame this can add up. The cost of holding gold stocks is much lower, in fact many major brokers now offer free stock trading. This may not seem like a big difference, but a few percentage points per year, compounded over a long term time horizon, can make a huge difference in the value of your portfolio.
Gold stocks Under-owned and unloved
The gold market is highly cyclical. During a stock bull market, when all stocks seem to be going up, gold stocks tend to be ignored. But when market uncertainty increases and gold investing is back in vogue, gold stocks tend to outperform, acting as a hedge for the rest of your portfolio. The GDX (gold miner index) is still around 50% below its all-time high in 2011. This means there may stll be a lot of value to be found in the gold stock space.
Conclusion about gold stocks in your investment portfolio
Gold Stocks can be an interesting alternative to holding physical gold for many investors. The risk profile that comes from a cash flowing asset may be more suitable for some portfolios when compared to a non-yielding physical asset. Additionally gold stocks are a long way from being overvalued and investors willing to do the research may be able to find significant value among these stocks. If we move to a world where gold becomes a relevant investment again, the owners of both gold stocks and physical gold are both sure to benefit. But shares of gold companies may prove a better investment for many types portfolios.
