Investing in Gold Versus Gold Stocks – Things To Keep In Mind

  • Oct 20, 2019 AEDT
  • Team Kalkine
Investing in Gold Versus Gold Stocks – Things To Keep In Mind

Whenever the market turns volatile, investors prefer to park their money in some safe asset, which can provide them good returns. One of the safe assets considered is Gold. Gold acts as a cushion against the volatility of the market. Right now, when there is so much uncertainty in the global markets due to US-China trade war and Brexit, investors are looking to invest in gold or gold related stocks. But investing in either of them is different. In this article we will discuss how investing directly in gold is different from investing in gold stocks.

Let’s now look at few major things that you need to know before investing in Gold.

When to Invest in Gold

The time of inflation is the best time to invest in gold as generally during that time the value of national currency decreases. The sooner one can detect such drops, the more room to make a profit. Important indicators like political turmoil and stock market declines could lead to deflation of country’s currency. If the government decides to print out more local currency, it becomes a clear indicator that the gold prices are going to rise in that country as the value of the currency will depreciate. There is not much room for the price of gold to rise when the local currency is strong, and inflation is not expected.

Advantages of Gold as an Investment

  • Holds Its Value: Gold tends to maintain its value over time because even if the price decreases, the underlying value of gold does not change much. This is largely because there is a fixed quantity of gold since it is a commodity;
  • Liquidity: Gold can be easily converted into cash anywhere in the world as the liquidity and universality of gold is unparalleled;
  • Hedge against Inflation: Gold rises in value when inflation takes hold because gold is priced in U.S. dollars, any deterioration in the dollar will logically lead to a higher price of gold. Due to which gold offers a much more stable investment than cash during inflationary times;
  • Universally Desired Investment: Gold is still a universal commodity, although, countries sell their currency futures, treasuries, and other securities around the world, unlike gold, they are subject to political chaos;
  • Diversification: Because gold often moves inversely to the stock market and currency values, it is an effective way to diversify/hedge one’s risk;

Disadvantages of Gold as an Investment

  • One cannot earn extra income through investing in gold: By investing in stocks or bonds, one can earn passive income through dividends, but in gold, one only gains through increase in the underlying price of gold;
  • Occupies space and needs insurance: If one chooses to buy actual, physical gold, he/she will not only need to store it, but will need to insure it as well otherwise, he/she won’t be able to replace it if it gets damaged or stolen;
  • Increases in gold value coincide with local currency devaluation: Many economists argue that gold only increases in value when the dollar is devalued, or inflation is strong due to which critics feel that gold doesn’t offer adequate returns in other markets;
  • Excessive Speculation can create a bubble: In volatile markets, many people start investing in gold which makes gold overpriced which means that one could lose value once the price corrects itself.

Ways of Investing in Gold

There are many ways of investing in gold:

  • Directly Buying Gold: One can buy gold directly in the form of coins or bullions; however, one must pay additional amount to store or secure it;
  • By investing in Gold ETFs: A gold ETF is an exchange-traded fund that specializes in investing in a range of gold securities. Such diversification can somewhat minimize your risk;
  • Through Gold Futures and Options: Derivatives options are now available that specialises in gold. When one expects that the value of gold is going to increase, he/she can invest in call options, on the other hand, he/she would purchase a put option if the prices of gold is expected to drop. These derivatives options are considered risky but offers huge returns.

Some investors prefer gold mining stocks as their prices follows the prices of commodities.

Gold Six Months Price chart (Source: Thomson Reuters)

Now let’s look at some gold mining companies trading on ASX

Newcrest Mining Limited

About the company: Newcrest Mining Limited (ASX: NCM) is into exploration, development, mining and sale of gold.

Newcrest Approves Cardia Expansion Project: The Newcrest Board has approved to Execution phase the first of two stages in the Cadia Expansion Project

  • The first stage includes beginning of the next cave development (PC2-3) and an increase in the nameplate capacity of the process plant to 33mtpa;
  • The second stage is focussed on a further increase in processing capacity to 35mtpa and recovery rate improvement projects.

Stock Performance: The stock of NCM was trading at $33.130 per share, on 18 October 2019, up by 0.06% from its previous closing price, with a market capitalisation of $25.46 billion. Its 52-week high and low is $38.870 and $19.640, respectively while the total outstanding shares of the stock stood at 768.84 million. The company has given a total return of 2.79% and 31.26% in the time period of 3 months and 6 months respectively.

Saracen Minerals Holdings Limited

Saracen Minerals Holdings Limited (ASX: SAR) is engaged in the activity of gold production and exploration. The market capitalization of the company stood at $2.72 billion as on 18th October 2019.

FY19 results highlights: The company reported strong results for FY19 with NPAT up by 22% to a record $92.5 million. Underlying NPAT was up by 40% to $94.2 million reflecting record production volumes, lower costs and a strong Australian-dollar gold price. EBITDA increased by 11% to a record $219.5 million and revenue were up by 9% to $555.6 million. Gold production saw a record growth of 12% to 355,077oz. The All-In-Sustaining-Costs (AISC) also reduced to $1,030/oz.

Good financial position of the company: The company’s cash and cash equivalent increased to $154.4 million at 30 June 2019 after spending $216.9 million on exploration and growth. It is a debt free company and the strong balance sheet supports ongoing investment in exploration and growth, including increasing Reserves beyond 3.3Moz and production to 400,000 oz p.a.

Stock Performance: The stock of SAR was trading at $3.30 per share, on 18 October 2019, up by 0.917% from its previous closing price, with a market capitalisation of $2.72 billion. Its 52-week high and low is $2.020 and $4.750, respectively while the total outstanding shares of the stock stood at 833.05 million. The company has given a total return of -18.11% and 29.41% in the time period of 3 months and 6 months respectively.


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