Investing in Gold Stocks

Gold stocks are publicly traded investments focused on gold. The industry consists of the following types of entities:

• Mining companies: These companies mine and sell gold.
• Gold-focused exchange-traded funds (ETFs): These funds own physical gold or shares of several gold mining companies.
• Gold streaming and royalty companies: These companies pay upfront fees to mining companies in exchange for:
  • A percentage of the mine’s revenue (e.g., a mining royalty).
  • The right to purchase the future production of a specific metal at a certain mine for a fixed price (e.g., a mining stream).

Gold is a safe-haven metal. Investors buy gold to hedge against risks like rising inflation, geopolitical events, and economic downturns that can cause the price of gold to be very volatile. That has been the case to start 2022. Gold surged by double digits during the first couple of months of the year, driven by inflationary and geopolitical concerns.

There are many benefits to buying gold stocks instead of the physical metal to reap the benefits of investing in gold. Gold companies can potentially generate higher total returns than an investment in physical gold. That’s because these companies can expand their production and reduce costs. These factors can enable gold mining companies to outperform the price of gold.

However, not all gold stocks outperform gold. Because of that, investors need to carefully choose the best gold stocks to buy.

Top gold mining stocks

Dozens of companies focus on mining gold, giving investors lots of options. Here are the top gold stocks to buy in 2022:

Source: company websites

1. Barrick Gold Corporation

Barrick Gold is striving to be the most valuable gold mining company in the world. The Canada-based company focuses on operating Tier One mining assets, which Barrick defines as those with:

• The ability to produce more than 500,000 ounces of gold per year
• At least 10 years of productive life remaining
• Low-cost operations, as defined by total costs per ounce

By focusing on operating large mines with significant remaining resources, Barrick can produce gold at a relatively steady pace for years. The company expects to produce an average of about 5.5 million ounces per year through 2030.

Barrick also forecasts that its all-in sustaining costs will decline in the coming years from roughly $1,000 per ounce in 2021 to less than $900 per ounce by 2026. Because of its focus on reducing costs, Barrick’s profits should continue to rise even if gold prices modestly decline.

Barrick complements its top-tier gold mining portfolio with a strong balance sheet. It has focused on paying down debt over the past several years through free cash flow and the sale of noncore assets. As a result, the company has reduced its interest costs, giving it increasing financial flexibility and strength to pay a growing dividend.

2. Franco-Nevada Corporation

Franco-Nevada is a Canada-based streaming and royalty company. It has a diversified portfolio, with agreements tied to gold, silver, the platinum group metals (PGMs), iron ore, and oil and gas. In the third quarter of 2021, 54% of its revenue came from gold.

A major benefit of Franco-Nevada's focus on royalties and streaming is that it reduces risk. It doesn’t face the capital and operating cost overruns that have historically plagued mining companies. At the same time, Franco-Nevada’s agreements position it to profit as its mining partners complete exploration and expansion projects.

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 invest in new deals and pay a dividend. Franco-Nevada has increased its dividend each year since its initial public offering (IPO) in 2008, hitting a milestone 15 consecutive years in 2022. The company also boasts a debt-free balance sheet -- a rarity in the mining industry -- giving it even more financial flexibility to invest in new royalty and streaming agreements.

Because Franco-Nevada can profit from gold mining without exposure to the risks of mine development, its stock has historically outperformed the price of gold and other gold mining stocks. All of these factors make it ideal as a gold stock.

Also, for those interested in ESG factors, in Franco-Nevada's 2022 asset handbook, the company stated a goal of achieving 40% diverse representation between the Board and senior management as a group by 2025. As Motley Fool cofounder David Gardner says, "Invest for the world you want to see."

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 about $15.6 billion in assets as of early 2022.

As of early 2022, the VanEck Vectors Gold Miners ETF held shares in 56 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)

The five stocks make up more than 51% of the ETF’s assets, with Newmont Goldcorp accounting for more than 16%. The gold stocks have market capitalizations ranging from Newmont Goldcorp’s $49 billion to Agnico Eagle Mines’ $13 billion.

With the exception of Wheaton Precious Metals and Franco-Nevada, these top holdings are the world's largest gold mining companies. Agnico vaulted up the list in 2022 by completing its merger with fellow gold miner Kirkland Lake Gold. Franco-Nevada and Wheaton Precious Metals are the leading gold streaming and royalty companies.

The 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 it a relatively cost-effective way to invest in many gold stocks.

Picking the best gold stocks

Many factors affect the price of gold, including monetary policy and inflation. For years, gold was the top choice of investors seeking to hedge against these risks. However, the rise of cryptocurrencies could cause gold and other precious metals to lose their luster, an emerging risk that investors need to monitor.

That aside, one of the best ways to invest in the gold market is through gold mining companies. That’s because they benefit from rising gold prices and their ability to increase production and reduce costs. Consequently, top gold mining companies can often outperform the price of gold.

The top-tier gold miners have low cost structures, manageable debt levels, and limited exposure to risky mining projects. Meanwhile, gold streaming companies generally offer the best risk/reward potential among gold-focused investment options. They are well positioned to benefit from higher gold prices without assuming the risks associated with mining physical gold.

Finally, investors who don’t want to try to identify the best individual gold mining stocks can consider buying shares in gold ETFs, 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 mining 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.