Which is Better: Gold Mining Stocks or Gold ETFs?

When it comes to gold investing, there are several options, each of which is worth serious consideration.  Most people are hesitant to buy physical gold as it cannot be purchased and sold in as fluid of a manner as a gold mining stock or gold ETF.  However, most investors are uncertain as to whether it is better to invest in a gold mining stock or a gold mining ETF.  Let’s take a look at why gold ETFs are the better of the two investing options.

Diversification is the Name of the Game

Gold mining stocks have had a fantastic run in recent months.  The money just keeps on flowing into gold mining stocks as the economy craters and investors look for safe havens.  However, there is no sense investing in one or two gold mining companies when you can minimize your risk with an investigation in an entire gold ETF.  This way, if one or two gold-related stocks suffer a dramatic decline, the remainder of the gold ETF holdings will still keep the ETF at a reasonable price. 

Furthermore, ETFs are becoming more and more popular with each passing year.  The ongoing spike in demand for gold ETFS  will help these funds reach new heights as time progresses.  The same enthusiasm is simply not there for individual gold mining stocks.  Opt for a gold ETF and there is a good chance the increase in price will be driven by fellow investors even if the value of gold stagnates or decreases. 

Recognize the Risk in Gold Mining Stocks

Gold typically peaks when the economy struggles and more money is pumped into this relatively safe investing space.  Gold peaked back in 2011 only to sell off across the next half-decade.  The value of gold dropped about 30% during this time.  However, gold miners’ declines in this period of time were particularly steep.  As an example, Golden Star lost the vast majority of its value, dropping 92%.  AngloGold Ashanti decreased 83% during this period of time.  Furthermore, one of Wall Street’s current darlings, Newmont Mining, dropped a whopping 66% during the selloff.  In other words, the leverage within gold mining business models works on the downside just as much as the upside.

It is only a matter of time until the gold bulls give way to the gold bears simply because markets are cyclical.  When that time comes, well-diversified gold ETFs will likely trade sideways or slightly decline.  Alternatively, individual gold mining stocks have the potential to suffer significant declines as shown above.  Why pour the bulk of your savings into a couple gold mining stocks when you can spread out the risk with a gold ETF?  This strategy simply does not make sense.

Find a Happy Medium Between the two Extremes

If you absolutely insist on owning a gold mining stock, buy your favorite along with one or several gold ETFs, hold across the long haul and you will likely make a considerable profit across posterity.  If your gold mining stock continues to increase in value, consider reinvesting some of the profits in gold mining ETFs for additional investment diversification and you are almost certain to be ecstatic with the return on your investment.

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