Gold mining stocks vs physical gold

Physical bullion is not the only way to gain exposure to the gold price, and invest in gold as a general asset. As well as unallocated accounts, gold ETFs , and paper gold, investment in the stocks of gold mining companies is another huge industry that depends on demand for the precious metal.

Although this is not strictly the same as buying gold, the performance of mining companies is inevitably linked to global demand for the metal. As such, it can be boosted by some of the same factors driving investment in gold, namely adverse economic conditions and political instability.

Gold’s global reputation as a reliable store of value that is able to resist economic and political catastrophe means that demand for the yellow metal increases considerably whenever investors lose confidence in the security of other assets. Naturally, when demand for gold increases, the profitability of the companies providing the metal will increase, benefitting the owners of shares in mining companies.

Are they essentially the same investment?

Despite the connection, investing in mining companies is, by and large, an entirely different
prospect to buying physical gold. The long term connection between gold and gold mines
is undeniable. However, in terms of investments there are also some key differences between
the two. Many advocates of mining stocks will argue that the gains available from investment
in mining companies are potentially much larger than from owning physical bullion. Despite
the nature of their operation, investing in mining companies is
essentially an investment in a
business, not a precious metal. This does, of course, carry some benefits. Shareholders in
a gold mining company will receive yearly dividends which investors in physical bullion will
not. Furthermore, like with any company, a well-run company can still be profitable even in
difficult times. This would mean that at any moment in time when demand for gold is low and
its price drops, a share in a profitable mining company could continue to offer a regular return.

On the other hand, mining stocks can also carry a level of risk that we wouldn’t usually associate
with owning physical bullion. In the same way that a well-run mining company can be profitable
in bad times, a poorly-run one could fail, even in good times. This would render shares in the
company completely worthless, highlighting the key difference between gold and other assets.
Equity in a company, whatever the industry, has no intrinsic value and is only worth a certain
percentage of whatever the company is worth. A share in a failed company is worth nothing and
it is therefore incredibly important to choose the right stocks. The same cannot be said for physical
gold. Although the price does indeed fluctuate, usually relative to the performance of the wider
economy, gold is a tangible asset that has always had a high value.

In conclusion, there are so many variables when investing in mining stocks that mean that, although they are associated, investing in gold producers and investing in gold are in fact two very different things. Their association is real – without demand for gold there are no gold mines- however the two assets have very different natures. A common motivating factor for investors in gold is the long term security that it can provide. Mines are businesses, prone to human error and increasing scrutiny regarding their environmental impact. As such it is possible, for economic reasons or otherwise, that they fail as organisations, making a loss for their investors. This level of risk is not present with physical, allocated gold bars and coins, which have an intrinsic value independent of any government or organisation.

While investing in bullion offers the ultimate security of holding a physical asset with tangible, intrinsic value, mining stocks depend on a long list of factors working in their favour in order to be profitable. Although this doesn’t necessarily make them bad investments, if an individual is looking for the long term security that we associate with gold, there really is only one option – bullion.