A Primer on Investing in Gold
Publisher’s Note: I wrote this gold investing primer for you last August, 2023. The price of gold has climbed to all-time highs since then, leading to several requests for information on the basics. What follows is a primer on investing in gold and silver stocks, from ETFs on down to individual junior mining stocks. We have premium investment research that focuses exclusively on that smaller end of the gold stock spectrum. To skip right to that, click here.
—Nick
This primer is for readers who are new to Digest Publishing or investors who are interested in learning more about gold and how to invest in it.
At the root of the matter, gold has been around for thousands of years as a store of value and a medium of exchange. And so in that sense, it's been a currency for millennia. Multiple cultures that never met each other thought it to be valuable in Asia and in Europe and Africa and South America. So humanity, as a species and as a global culture, has gravitated towards this metal for a long time as something that is inherently valuable.
Over the years that has transformed into monetary uses as well. There were gold and silver coins even in the Bible. And in the present day, central banks own gold on their balance sheets and over the past couple of years have increasingly been buying more gold.
And really, it's as simple as being fungible.
An ounce of gold has the same chemical properties anywhere in the world. Any gold you dig out of the ground on any continent is the same thing. So it's fungible. They can replace each other on a unit basis, one to one.
And there's no counterparty risk is the other big thing. There's nobody on the other side of gold like with a stock or bond trade. It's just gold.
That's one of the reasons Bitcoin has been so popular as well. No counterparty risk. Gold and Bitcoin share a lot of the same investment attributes.
And the last thing I would mention as a reason to include gold in your portfolio is its history of protecting your purchasing power. We all know that your grandmother talks about buying a loaf of bread for 25 cents so many decades ago. And now we know it takes many more dollars to buy that same loaf of bread whereas the same amount of gold would buy that loaf of bread in the 1950s or in the 2020s.
How Should You Approach Buying Physical Gold?
When I think about physical gold, I don't view it as an investment. Some people do.
You hear about gold bugs or silver stackers, and they're very much into owning gold coins or bullion as an investment and include that in their portfolio.
I simply view physical gold as an insurance policy.
I think most people should hold 1% to 5% of their total net worth in some form of precious metals bullion — gold or silver, or platinum or palladium if that's your thing. And hold it somewhere safe, either in a safe that you control or a safe deposit box at a bank.
And the easiest way to do that is just to buy coins that are minted by a reputable country’s mint. Here in the US we have the Gold Eagle coins. In Canada, they have Maple Leafs. And there's other countries that produce reputable bullion like South Africa and Australia, for example. Those come in different weights, like one ounce, half ounce, etc. And they are the most common and most globally accepted form of bullion.
You can also buy old US coins like Saint-Gaudens gold coins, Double Eagle gold coins, Liberty Eagle gold coins, and Indian Head gold coins. They have a little bit less gold content. Instead of one ounce they have 0.9675 ounces, but they typically get a bit of a premium because they're old and rare.
I have both modern and collectible gold coins in my bullion holdings.
We have a good relationship with Van Simmons over at David Hall Rare Coins. Readers would do themselves a service to contact Van if they're interested in buying physical gold. He's been in the industry for decades and literally designed the standard by which gold coins are graded through PCGS, which is Professional Coin Grading Service. He's the man to know when it comes to gold coins and bullion. He's just a wealth of information, and we don't get anything for saying that. He's just been good to us over the years.
What Kind of Gold ETFs Are Available?
There are different kinds of funds in any sector.
In the gold sector specifically, there are funds that track the price of the metal. The biggest one is the SPDR Gold Shares (NYSE: GLD). You're not actually buying actual gold with this fund, instead you're buying an equity that is built to track the price of gold. So when you buy a share of GLD you're not buying any amount of gold, you're buying an instrument that's meant to track the price of gold. That fund has traded since 2004, and is the most liquid gold fund in the world. So many people when they want exposure to gold will simply turn to GLD to track the price if they think it's going to go up, or conversely short GLD if they think it's going to go down.
There are also gold trusts, which are funds that trade on exchanges, just like ETFs, except they do own physical gold, and what you're buying represents a certain amount of physical gold. The VanEck Merk Gold Trust (NYSE: OUNZ) has a gold trust where you can even take delivery of the gold that your shares of their trust represent.
That's the main difference between a trust and a paper gold ETF — both are going to reflect the price of gold to the upside and the downside, but one does so through various financial instruments, and one does so by owning physical gold on a one-to-one basis relative to the units of the trust that are out.
And then there are leveraged gold funds — and we won't get into them too deeply — that allow you to reflect two times the price of gold to the upside or downside. Obviously, they are more risky and meant to be used more in the short-term because the time value of money is such that to generate that leverage the fund doesn’t track the gold price over time.
There are also gold ETFs that own gold mining stocks. There are various gold ETFs out there that focus on different sub-sectors of the gold market. The Van Eck Gold Miners (NYSE: GDX) focuses on gold producers, for example. While the Van Eck Junior Gold Miners (NYSE: GDXJ) holds junior gold miners, which include smaller gold mining companies and even some that are not even producing yet.
All these things have various levels of risk. Owning a trust that owns actual gold is much different than owning an ETF that tracks tiny gold stocks, for example. And so we have different products run by different editors that focus on different things. You might find a gold ETF like GLD or a gold ETF that tracks large gold producers in my monthly service called Foundational Profits, for example. Whereas you wouldn't find that in the publications that Gerardo writes, like Junior Resource Monthly, because he focuses just on individual stocks and just on the smaller end of the spectrum, which carries more risk. So that's how we think about that as a publishing company.
How to Invest in Gold Stocks
There are different classes or sub-sectors of gold stocks, just as there are in other sectors of the market.
The biggest and safest are gold royalty companies. Those are companies that don't produce gold and they don't own the mines. Instead, they have helped fund mines earlier in their life in exchange for some percentage of what the mine produces, either the right to buy some of that gold at a fixed price or just a straight up percentage of the profits that the mine generates over its life.
Royalty companies give companies that are developing gold mines loans. It's a form of financing for a gold mine. Royalty companies give the gold development companies capital to build the mine in exchange for a royalty. So they have royalties from different mining companies all over the world. And in that way they're much safer and lower risk than individual gold mining stocks because they don't have single asset risk. They don't have a single country risk. They don't have operational risk. They simply get a percent of the gold that's coming out of the ground or a percent of the cash that is generated as a result of the sale of that gold. There aren’t that many quality gold royalty companies, and the three largest you should start looking at are:
- Royal Gold (NASDAQ: RGLD)
- Franco Nevada (NYSE: FNV)
- Wheaton Precious Metals (NYSE: WPM)
Then there are smaller companies that have either fewer royalties or they have royalties on companies that are not producing yet, so you're waiting for those mines to come online to then begin generating a royalty revenue or cash flow.
The next sub-sector would be senior gold producers. These are the large producers that have tier one assets that are the largest gold producers in the world. Companies like Barrick Gold (NYSE: GOLD) and Newmont Mining (NYSE: NEM), for example.
Then there's the mid-tier producers, which have assets that aren't as large as the mines that the senior producers have. They can have multiple mines but they're simply not at the production profile on an ounce basis that the senior gold producers are. These would be companies like Alamos Gold (NYSE: AGI) or like Hecla Mining (NYSE: HL) that have a smaller production profile and potentially higher cost because their assets aren't as scaled.
And then from there, there are junior gold companies, which are essentially broken up into developers that are building a gold mine that has already been discovered and financed, or explorers, which are drilling holes looking for the next gold deposit that can be turned into a mine.
I gave you those in order of increasing risk. Royalty companies being the lowest risk and individual junior explorers being the highest risk. So, same as with ETFs, we focus on those in different publications. Foundational Profits, which I write, might have royalty companies or senior producers. And Gerardo's Junior Resource Monthly would have junior gold companies like developers and explorers. That's how we divvy up our focus on the subsectors of gold stocks.
The more risk you're willing to take on directly relates to the amount of potential gains that could be at hand. When you hear about gold stocks that have gone up a lot in percentage terms, that’s typically smaller companies, developers, and definitely explorers that found something and then went up significantly as a result. You can see one exciting gold exploration stock we’re following here.
And know that the majority of smaller gold companies that are looking for something don't find anything worthwhile at all. And so that's why it's really important to do your due diligence and to invest in someone like me or Gerardo who knows the sector and can help you navigate the pitfalls. Because resource exploration in general is a very high risk business.
How to Start Investing in Gold
Going back to the first thing we talked about, you can start with physical gold. I recommend a one to five percent allocation based on your net worth held in bullion. That's easy. Most people can do that without any additional insights, advice, or recommendations.
But when you start getting into the selection of individual gold funds or individual gold stocks, people typically need a bit more guidance. And that's where newsletter writers like us come in. We provide that information on a weekly or monthly basis, depending on the publication.
The other thing is that gold trades on different metrics than individual companies. Gold doesn't have earnings, for example. It doesn't generate revenue. There's no cash flow. It has more to do with sentiment as it relates to fear in the market. Gold has historically been a ‘fear trade’. Think about when there's significant volatility in the market or when there's an outbreak of war or some geopolitical event. Markets typically have turned to gold as a safe haven, and so you'll see some capital go into gold during those types of events that moves the price higher.
On the other hand, gold also trades based on its relationship with bond yields and the dollar. A weaker dollar is good for gold because it then takes more dollars to buy that gold. And lower interest rates are better for gold because gold doesn't yield anything. So the higher interest rates are on bonds the less attractive gold is to most investors because gold doesn't generate any yield.
And these variables are changing all the time. Economies are cyclical. The main reason this publication is called Daily Profit Cycle is because markets move in cycles. The resource market moves in cycles. The economy moves in cycles. And that's what we're chronicling in our premium publications on a weekly and monthly basis. It’s how wee keep our subscribers in tune with how the markets are moving and show them how to position for what those market cycles are doing.
And right now it’s sending gold stocks like this higher in a hurry.
Call it like you see it,
Nick Hodge
Publisher, Daily Profit Cycle