Investing in Gold Stocks

Gold stocks are stocks of companies and funds focused on gold. The industry mainly comprises mining companies that dig up and sell gold. But it also includes gold streaming and royalty companies, which act as middlemen in the sector. These companies pay an up-front fee to a mining company in exchange for a percentage of the mine’s revenue or the right to purchase its future production at a fixed cost. Finally, gold investors can also purchase shares in gold-focused exchange-traded funds (ETF), which hold either physical gold or shares of mining companies.

With so many options, it can be hard for gold investors to know which ones to choose. Here's a look at the sector's top choices.

Top gold mining stocks

There are many benefits to buying gold stocks instead of the physical metal. The main draw is that these companies offer the potential of leveraged upside to the price of gold. When prices rise, these companies can increase their gold production and grow their total sales.

Unfortunately, not all gold stocks are successful in even matching the price performance of gold, let alone outperforming the precious metal. Because of that, investors need to choose gold stocks that are most likely to succeed. Three top options are:

Source: company websites

Why These Stocks Deserve Attention

Here are some quick introductions to the companies we listed above, and why they deserve to be considered some of the top gold stocks you can buy.

Barrick Gold

Barrick Gold (NYSE:GOLD) has a bold vision of being the world's most valued gold mining company. Driving that mission is its focus on operating Tier One mining assets, which Barrick defines as mines that:

• Produce more than 500,000 ounces per year
• Have at least 10 years of productive life remaining
• Deliver total cash costs per ounce in the lower half of the industry cost curve

This focus on operating large mines with significant remaining resources will enable Barrick to produce at a relatively steady pace for years. It expects that its output will average about 5 million ounces of gold per year through 2029. Meanwhile, thanks to its Tier One assets' low-cost nature, Barrick anticipates that its all-in sustaining costs (AISC) will decline in the coming years from roughly $1,000 an ounce in 2020 to less than $800 an ounce by 2024. Because of that, its profits, and therefore its stock price, should rise, even if gold prices decline modestly.

Barrick complements its top-tier gold mining portfolio with a rock-solid balance sheet. The company has focused on paying down debt over the last several years, which has reduced its interest costs. That's giving it even more financial flexibility, which it's using to pay a growing dividend.

Franco-Nevada

Franco-Nevada (NYSE:FNV) is a streaming and royalty company. It has agreements covering gold, silver, the platinum metals group (PGM), and oil and gas. However, the bulk of its revenue (65% in 2019) comes from gold.

Franco-Nevada's streaming and royalty contracts provide it with lots of cash. That gives it the financial flexibility to invest in new deals and pay a dividend, which it has grown each year since its IPO in 2008. The company also boasts a debt-free balance sheet as of the middle of 2020 -- a rarity in the mining industry.

Another benefit of Franco-Nevada's focus on royalties and streaming is that it doesn't have exposure to capital and operating cost overruns, which have historically plagued mining companies. However, it still offers the same upside profile as a miner, given its leverage to the price of gold, exploration and expansion upside, and dividend yield. Because it combines those benefits without the sector's negatives, Franco-Nevada's stock has historically outperformed both gold and the mining sector, making it an ideal gold mining stock.

SPDR Gold Trust

SPDR Gold Trust (NYSEMKT:GLD) is an ETF focused on gold. While several gold-focused ETFs hold shares of gold mining, streaming, and royalty companies, this ETF stands out because it invests directly in the physical metal, which it stores in vaults.

Because of that, this ETF does an excellent job matching the performance of the price of gold bullion. There is some drag on its results, since it charges a 0.4% expense fee. But SPDR Gold Trust is still a great means of investing in physical gold, because it offers similar price performance without some of the drawbacks of owning actual gold, like commission, insurance, and storage costs. It's also a much more liquid investment, because investors can buy or sell it in an online brokerage account. Meanwhile it's less risky than investing in a gold mining stock, because those companies can underperform the price of gold amid capital and operating cost overruns, management missteps, and other difficulties.

There are some disadvantages to owning a gold ETF focused on holding physical gold. Most notably, it caps an investor's upside to the rise in the price of gold, less fees. In contrast, gold miners, streaming, and royalty companies offer leveraged upside to the price of gold as they increase production -- and many of these companies pay their investors a dividend.

However, for investors seeking an investment that roughly matches gold prices, this ETF is a top option.

Picking the right gold stock investment for your situation

Buying physical gold in any form -- bars, coins, medals, or even jewelry -- is the most direct way to gain exposure to gold prices. However, buying physical gold also means you have to pay high commissions and bear additional costs and risks related to the transportation, storage, and insurance of the precious metal.

Gold exchange-traded funds (ETFs) are a more convenient and cost-effective means of investing in gold stocks, especially for those who lack the inclination or time to research specific gold companies. A gold ETF offers broad exposure to the sector by holding either shares of gold mining companies or physical gold. Because of that, you don't have to be a stock-picking guru to participate in the gold mining industry's upside. However, ETFs have drawbacks, including their failure to offer the uncapped upside potential of a gold mining stock.

Gold stocks -- especially gold streaming stocks -- offer the highest return potential among gold investment options because, in theory, a company's share price should eventually reflect its operational and financial growth. That means shares of a fundamentally strong gold company that's maximizing returns on invested capital and is committed to shareholders can earn investors strong returns in the long run, even in a low-price environment for gold. Of course, investing in stocks is itself risky, and gold stocks are no different.

Given these differences, investors need to weigh the rewards against potential risks to choose the right gold stock for their situation.