Investing in Gold Stocks

Gold stocks are those of publicly traded companies and exchange-traded funds (ETFs) that are focused on gold. The industry consists of these types of entities:

• Mining companies: These are the companies that mine and sell wholesale gold.
• Gold streaming and royalty companies: These companies pay upfront fees to mining companies in exchange for a percentage of the mine’s revenue or the right to purchase its future production at a fixed wholesale price.
• Gold-focused ETFs: These exchange-traded funds own either physical gold or shares of gold mining companies.

There are many benefits to buying gold stocks instead of the physical metal. Gold companies can likely generate higher total returns than simply an investment in physical gold because, when the price of gold rises, these companies can expand their operations and their profits. This growth should enable their stocks to outperform the price of gold.

But not all gold stocks outperform the price appreciation of the precious metal, which means that investors need to choose their gold stocks carefully.

Top gold mining stocks

Here's a look at some top alternatives for investing in gold:

Source: company websites

1. Barrick Gold Corporation

Barrick Gold is striving to be the gold mining company with the world's highest valuation. The Canada-based company focuses on operating Tier One mining assets, which Barrick defines as:

• Able to produce more than 500,000 ounces of gold per year.
• Having at least 10 years of productive life remaining.
• Operational at low cost, as defined by total cash costs per ounce.

By focusing on operating large mines with significant remaining resources, Barrick is likely able to produce gold at a relatively steady pace for years. The company expects the average annual gold output of its mines through 2030 will be about five million ounces. Barrick also forecasts that its all-in sustaining costs will decline in the coming years from roughly $1,000 per ounce in 2020 to around $800 per ounce by 2025. Barrick's profits should continue to rise even if gold prices decline modestly.

Barrick complements its top-tier gold mining portfolio with a strong balance sheet. By focusing on paying down debt over the past several years, the company has reduced its interest costs. Its increasing financial flexibility and strength is enabling Barrick to pay a growing dividend.

2. Franco-Nevada Corporation

Franco-Nevada is a Canada-based streaming and royalty company with agreements to receive gold, silver, the platinum group metals (PGMs), iron ore, and oil and gas. In 2020, 70% of its revenue came from gold.

A major benefit of Franco-Nevada's focus on royalties and streaming is that it is not vulnerable to the capital and operating cost overruns that have historically plagued mining companies. At the same time, as the company's mining partners complete exploration and expansion projects, Franco-Nevada is positioned to profit similarly to the mining operations.

Franco-Nevada's streaming and royalty contracts provide it with the ability to generate lots of cash by selling the physical commodities it receives. That cash flow enables it to both invest in new deals and pay a dividend, which the company has increased each year since its initial public offering (IPO) in 2008. The company also boasts a debt-free balance sheet as of the beginning of 2021 -- a rarity in the mining industry.

Because Franco-Nevada significantly profits from gold mining without being exposed to the sector's risks, the company's stock has historically outperformed both gold itself and the mining sector. All of these factors make it ideal as a gold mining stock.

3. VanEck Vectors Gold Miners ETF

The VanEck Vectors Gold Miners ETF holds the stocks of large gold mining companies. It’s one of the largest gold ETFs, with nearly $16 billion in assets as of mid-2021.

At the time of this writing, the VanEck Vectors Gold Miners ETF owns shares of more than 50 gold mining companies. Its top five holdings by value are:

• Newmont Goldcorp (NYSE:NEM)
• Barrick Gold Corporation (NYSE:GOLD)
• Franco-Nevada Corporation (NYSE:FNV)
• Wheaton Precious Metals (NYSE:WPM)
• Newcrest Mining (ASX:NCM)

These five stocks account for more than 46% of the assets of this gold ETF, with Newmont Goldcorp comprising more than 15%. These gold stocks have market capitalizations ranging from Newmont Goldcorp’s $56.9 billion to Newcrest Mining’s $17.7 billion.

With the exception of Wheaton Precious Metals and Franco-Nevada, these top holdings are the world's largest gold mining companies. Franco-Nevada and Wheaton Precious Metals are the leading gold streaming and royalty companies.

This gold ETF enables investors to easily own a diverse, high-quality group of large-scale gold companies. The ETF also has a reasonable expense ratio of 0.51%, making this investment option a relatively cost-effective way to invest in many gold stocks.

Picking the best gold stocks

The best gold mining companies have low cost structures, manageable debt levels, and limited exposure to risky mining projects. Gold streaming companies generally offer the highest return potential among gold-focused investment options because they are well-positioned to benefit from higher gold prices without assuming the risks associated with mining physical gold.

Investors who don’t want to be tasked with identifying the best individual gold mining stocks can instead buy shares in gold exchange-traded funds, which are more convenient and cost-effective options for investing in gold stocks. A gold ETF offers broad exposure to the sector by owning either shares of gold companies or physical gold. Because of the wide availability of gold stocks and ETFs, you don't have to be a stock-picking guru to participate in the gold industry's upside.