The continued zero interest rate policy of the ECB is causing many investors to speculate on gold as a real asset. But not all that glitters is gold. Gold stocks enable an indirect investment in the shiny precious metal. But they offer the same advantages as physical gold in the form of bars or coins, i.e. retention of value and inflation?
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What are gold stocks?
The terms gold stocks (also spelled gold stocks), gold mining stocks or mining stocks refer to stocks of mining companies that specialize in the exploration and production of precious metal gold.
Often the milkmaid bill is made that investing in gold stocks is an alternative to buying physical gold. However, this logic falls short and rarely works. The main argument put forward is that the mine operators benefit from a rising gold price and that shareholders also participate indirectly in the rising gold price through dividends and price gains.
Gold stocks versus physical gold
Stocks are objects of speculation and, unlike physical gold, do not offer any protection against inflation. Read below about the reasons for this and why an investment in gold stocks is fundamentally different from gold as an investment.
How does investing in physical gold work?
While gold stocks represent an indirect investment in gold, their counterpart is the purchase of physical gold in the form of bars or coins direct investment to be understood.
However, this so-called investment gold is only conditionally suitable for building up assets, as it is its owner neither interest nor dividends. On the other hand, however, a certain degree of protection against inflation is ascribed to physical gold: As a limited resource and a coveted material asset, gold is able to withstand inflation with a real equivalent.
Physical gold is often recommended to hedge a portfolio and especially to protect against the volatility of stocks. The reason for this is the low correlation between the gold price and stock markets in the past. Investing in the rare precious metal enables the portfolio to be diversified.
How does the price for physical gold come about?
The gold price describes the current market price for the precious metal gold and is created through trading on the international commodity exchanges. The price of gold fluctuates relative to trading but is less volatile than stock prices. A complex interplay of different factors influences the daily gold price.
How does the price of gold stocks come about?
The gold price also has an effect on gold mines and thus on their securities – the prices of gold stocks are, however, much more strongly influenced by the entrepreneurial performance of the gold mine operators and the general mood on the stock exchanges. The share price is therefore not only set on the commodity exchanges but predominantly on the stock market. This leads not only to the fact that the gold price is only partially reflected but also to the high volatility of the stocks.
One of the main reasons for the fluctuations in the value of gold stocks is that the exploration and production of the rare precious metal is associated with many obstacles and is particularly resource-intensive. In addition, gold deposits often occur in countries without sufficient legal security for operating companies. Problems with production licenses and expropriations are not uncommon. The price fluctuations of gold stocks are very sensitive to both negative and positive news.
So-called junior gold explorers who are committed to the development of new gold deposits are considered particularly unsafe. Established gold miners, on the other hand, who already have mines, have a better reputation.
When is an investment worthwhile?
In contrast to physical gold, gold stocks are quite suitable for building up wealth, because they reward their owners with dividends and price gains in the best possible case. Nevertheless, it is a risky investment. And as with any other equity investment, the same applies here: Industry knowledge and specialist knowledge are essential. If you also include the ethical concerns raised by modern gold mining, an ordinary DAX ETF or MSCI World ETF ultimately seems to be the better choice.
For investors who, however, interest in investment intangible assets have gold, gold stocks are definitely not suitable. The investment cannot be compared to an investment in physical gold. Because while the value of investment gold is determined solely by the current gold price, the prices of gold stocks are extremely volatile and depend on numerous factors.
In addition, unlike buying physical gold, investing in gold stocks does not allow diversification of a portfolio that contains many securities.
In addition, shares in general and thus also gold shares are always subject to the withholding tax and, as share certificates, do not represent any ownership rights as one has with physical gold.