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Thinking About Buying Gold? Consider These Alternative Investments

By Ryan Downie – Updated Jul 24, 2020 at 4:38PM

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With gold reaching an all-time high, is it time to buy?

Gold is often considered a safe-haven asset in times of economic uncertainty. The metal has been used as a medium of exchange for thousands of years in different nations, and it has practical use in industrial applications, medical or dental procedures, and jewelry. Gold is viewed by many investors as a tool to offset the effects of inflation or low interest rates, so public interest in gold as an asset has surged in 2020 as economic conditions deteriorated.

Gold spot prices have risen 32% over the past 12 months and 24% year-to-date in a clear reaction to the global recession and heavy central bank activity. This places the metal at a 9-year high. 

Gold bullion can be purchased from a number of reputable dealers, or investors can opt for a service that stores bars remotely. However, it may be impractical for most individuals to participate in the market for physical gold due to challenges with security, exchange and transportation costs, or functional liquidity; if you hold actual gold, selling it requires the physical transportation to a buyer and negotiations over price. Alternative solutions include stocks and ETFs that provide very similar performance with more convenient features. 

Gold bars with stock chart in the background

Image source: Getty Images.

Try a Security Instead of a Metal Bar

Investors can purchase highly liquid ETFs that provide indirect ownership of physical gold thanks to several popular and efficiently managed ETFs. The SPDR Gold Trust and the iShares Gold Trust are both large funds with reasonable expense ratios that track the spot price of gold. Those ETFs have returned 42% over the past year and 20% year-to-date. There are numerous other funds that own physical gold but provide different options in regards to leverage, storage locations, and other features. Investors should note that long-term gains on these ETFs are taxed as collectibles, which carry a much higher tax rate than most other capital gains. 

Owning the Producers of Gold

Mining stocks are another method to gain exposure to gold prices without actually purchasing gold. These companies are engaged in the acquisition and development of property, as well as the extraction of gold. They have rights to minerals in the ground, and their cash flows are dictated by the prices they can sell the products of mining activities. Therefore, the value of many mining stocks rise and fall with the market prices of precious metals.

Some of the largest gold mining companies include Newmont, Barrick Gold, Franco-Nevada, and Wheaton Precious Metals. There are also popular gold mining ETFs for investors who favor diversification or lack the time and expertise to conduct research on individual companies. These include the VanEck Vectors Gold Miners ETF, Sprott Gold Miners ETF, and iShares MSCI Global Gold Miners ETF.

Exposure to gold miners undoubtedly provides strong correlation to physical gold performance, but these do not serve as a perfect proxy. Over the long term, mining stocks have been more volatile and have delivered inferior returns to gold. The stocks, however, tend to outperform physical gold during extended bull markets, as their prices rise along with companies from other sectors. 

This divergence is attributable to several factors. Not all gold mining companies are so-called "pure plays," meaning that they also deal with other metals that impact operating results. Further, these are all real-world companies that have stock prices influenced by different aspects of running a business such as labor issues, debt management, operating efficiency improvements, and competitive factors. These events all cause the stocks to fluctuate in price independent of gold performance.

Owning physical gold might ultimately be a convenient and preferable option for many investors, but for most, there are better alternatives. Whether it is using ETFs to gain indirect exposure or using mining stocks, there are dozens of viable options that can be implemented in your investing strategy.

Ryan Patrick has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

SPDR Gold Trust Stock Quote
SPDR Gold Trust
$151.23 (-1.16%) $-1.78
Barrick Gold Corporation Stock Quote
Barrick Gold Corporation
$14.19 (-2.00%) $0.29
Newmont Corporation Stock Quote
Newmont Corporation
$40.59 (-1.60%) $0.66
Wheaton Precious Metals Corp. Stock Quote
Wheaton Precious Metals Corp.
$29.08 (-3.20%) $0.96
VanEck Vectors ETF Trust - VanEck Vectors Gold Miners ETF Stock Quote
VanEck Vectors ETF Trust - VanEck Vectors Gold Miners ETF
$21.86 (-2.58%) $0.58
iShares Gold Trust Stock Quote
iShares Gold Trust
$30.82 (-1.16%) $0.36
Franco-Nevada Stock Quote
$111.58 (-2.23%) $-2.55
Sprott ETF Trust - Sprott Gold Miners ETF Stock Quote
Sprott ETF Trust - Sprott Gold Miners ETF
$19.09 (-3.24%) $0.64

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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