Why to invest in Gold Stocks

Since time immemorial gold has been used as a form of currency and as a form of storing wealth. Gold has historically been seen as a symbol of wealth, however the function of gold has greatly evolved in the last hundred years with the evolution of modern economic and financial system.

Gold purchase

Ever since gold was decoupled with the dollar in the 70s, the value of gold has attracted investors who consider gold a safe haven asset and quite rightly so. If we look at the value of gold in the last two decades we can see that at the turn of the millennium gold was around $300 per troy ounce and at present the price forgold is approximately around $1900 per ounce. This translates into an astounding over 500% rise in value over two decades.

Such an astounding capital appreciation over two decades is the hallmark of gold, furthermore this bullish trend becomes stronger whenever the dollar weakens, as it is happening right now due to the pandemic.

This begs the question that how should one invest in gold? There are two main ways of investing in gold. The easiest way is to simply buy gold bars and coins, this method is preferable for those who want possession of physical gold. While gold bars may not be very liquid, gold coins in smaller weight categories such as 10 gram coins are liquid in nature. Investment in physical gold is preferable for investors looking to hold their wealth for the long term.

The problem with physical gold however is that it requires storage space, security and insurance. If physical gold is being kept in a self directed IRA then it requires a custodian who can hold the gold in a secure manner.

Another way of investing in gold is through investment in gold stocks. Gold stocks are basically the stocks of gold mining companies and they allow investors to invest into gold without physically possessing the gold. This rules out any security risk and also cuts down on storage costs.

Gold stock investment is also highly liquid, the shares of gold mining companies can be bought and sold in the stock market at any time, thus giving the investor much needed liquidity that is not available with physical gold.

Gold purchase

Gold stock investment carries the best of both gold and stock investment. The price of gold stock closely reflects both the price movement of gold and also the price movements caused by the performance of the gold mining company and the performance of the relevant stock market.

Gold stock investment is preferable for investors who are looking to gain from the short term price movements of gold as well as the long term capital appreciation due to the price of gold and value addition by the relevant mining company. Furthermore, gold stocks have an edge over bullion because of dividends. Investment in bullion does not carry any return in the form of interest or dividends, the only return from bullion investment comes from capital appreciation. Whereas gold stocks carry dividends, which allow investors to earn periodic returns on their investment in addition to capital appreciation.

The highly liquid nature of gold stocks allows investors to cash in from favorable price movements. In addition to this gold, be it bullion or stocks, serves as a very good diversifier of portfolio. The last decade saw gold stocks battle through volatility, for the greater part of the last decade gold stocks tracked lower than bullion however the last year or so gold stocks have tracked higher than bullion.

The current bullish trend is driven by the fears of an impending economic crisis on the horizon due to the pandemic. Interest rates are down and as more waves of the virus cripple the global economy, gold is expected to rise further.

Industry experts believe that the current bullish trend in the value of gold is expected to continue, some have even predicted the price of gold to reach as high as $2500. Thus, as long as bullion continues the bullish trend, gold stocks will trend even higher.

Gold purchase

Even investors like Warren Buffet are cashing in on the bullish trend in the gold market. Earlier in August, Buffets investment firm dumped stocks in airlines, hotels and banks because these sectors were expected to be hit badly from the economic crisis caused by the pandemic. However the only investment that Buffet was interested in during the pandemic, when rest of the investors were dumping their investment were gold stocks. Buffet liquidated his investment from the aforementioned sectors and invested it into market leading gold stocks. Buffets investment in gold stock is currently worth over $565 million.

Due diligence however should be carried out before investing into gold stocks because investment into gold stock is in the end investment into the gold mining company, which means that investors also need to consider the financial fundamentals of the mining company, its management, past performance and payout history.

Conclusively it can be said that with proper due diligence and effective investment strategy, investors can use gold stocks not only to diversify their portfolio but also to maximise their return on investment by strategically timing the trades.

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