The Safest Way to Invest in Gold

The following is a guest post by Shaun Connell, the webmaster of Learn Mining News.

Complete financial security is impossible. No matter what happens, you can lose your shirt – no bank, no government, no portfolio is foolproof. Risk is simply a part of financial life.

But even though risk is inherent, that doesn’t mean you can learn actionable steps to mitigating your financial or investing risk. In this post, we’ll be discussing on specific method of minimizing your investing risk – learning the safest way to invest in gold.

Gold Speculation is Risky

All speculation is risky. There’s a lot of debate about what “speculation” even means, but a general consensus is this: speculation is when you only profit after you sell your assets. In other words, speculation is all investing where your investment doesn’t earn an income. Flipping real estate, buying gold when it’s cheap to sell when it’s expensive, buying and selling baseball cares – these are all speculations.

An income-earning investment is obviously quite a bit different. It’s when the asset you’ve invested in provides an actual income, such as with dividend stocks, purchasing a small business, bonds, etc. These are all income-earning investments.

Gold speculation, and all speculation in general, is risky because if the price of your investment goes down, you can lose money. If you buy gold at 1200 per oz and it drops to 300 per oz, you’ll probably not make any money for decades – if at all. So, rather than getting a steady 10% return, you could get less than 1%, or if you sell before the value increases, you could lose most of your investment.

Speculation is something even big financial institutions are cautious with – a fairly novice investor has no business making big speculations. I don’t speculate with my finances at all, and prefer to put my money into income-producing investments exclusively.

But what does this have to do with investing in gold? Because the best gold investment isn’t necessarily physical bullion – but mining stocks.

How to Invest in Gold With Less Risk

Gold mining stocks are a safer way to indirectly invest in gold than physical gold bullion. The reasoning is as follows:

• Less Volatile. Stocks in general swing less than the price of gold, especially the bigger stocks. There are exceptions, of course, but mining stocks is simply less volatile. That means there’s less of a chance you’ll lose your investment in a price swing.

 

• More Secure. It’s hard to steal a gold mine. It’s a lot easier to steal a couple of ounces of gold. By having your money in gold mining stocks, you’re less likely to get robbed and lose your investment to a thug.

 

 

• Gives Income. In my opinion, this is easily the best justification for investing in mining stocks and not metal bullion – stocks can provide a steady dividend income. By providing you with a dividend income, you can go ahead and just play it safe and never sell at all. This gets rid of most speculative risk on the part of your investment.

 

Conclusions

Of course, just because gold mining stocks are less risky than gold bullion doesn’t mean you should necessarily forego investing in physical assets at all. There are still reasons to own the physical product – hedging against a worst-case economic scenario, investing “off the grid”, etc.

In the end, speculation is risky, dividend investing is often less so, and mining stocks are one of the best ways to invest in gold with less risk.

Questions for you to consider:

• Do you think gold is going to go up over the next year?

 

• Do you think gold is going to go up over the next 20 years?

 

 

• Do you have any other strategies you use to cut back on risk?

 

Comments

[Eugene Krabs]

Hmm, I'm afraid I do not agree with your definition of speculation because, regardless of what kind of investor or trader you are, everybody invests somehow in the hopes that their portfolio will grow over time.

Rather, speculation is a timing. That is, you think it's low right now and it's going to go higher in the future. So, you buy now with the plan sell later. That's speculation. It doesn't matter if it actually does go higher later. That's the risk of speculation, but not speculation in and of itself.

This is important because there are also people who view gold as a stabilizer in their portfolio, and as such, there are people who do buy gold passively, through dollar-cost averaging. In this case, it is NOT speculation, because no timing is involved. Otherwise, gold speculations is indeed more volatile than even the stock market in general.

Buying gold mining companies is an interesting twist to the gold bug theme though. They are typically available through certain ETFs and yes, they do pay a dividend (although it's typically a very small yield and actually should not be considered from a valuations perspective).

If you're looking for stable commodities company that pays dividends, I personally prefer power companies (DUK), or better yet, waste management (WM). These are the things that all contemporary civilizations need, minus the controversy over gold. Of course, dividend stocks also come with their own set of risks as well, so it's important to analyze your portfolio and investment preferences before buying.

[Pop]

FMF,
You need to screen your guests a little more carefully; granted you're obviously far from an expert on these matters, but statements like the following are just laughable and easily disproved:

"Gold mining stocks are a safer way to indirectly invest in gold than physical gold bullion."

[Tyler]

Some quick things that are missed-

you are exposed to company management risk.
hedging risk.
S,G and A risks- operations.
fraud risk- "enron, a great way to invest in oil"
valuation risk.
Regional/political risk (where are the mines?)
You dont own gold, you own a company.
Many gold stocks have underperformed the physical gold price.
Financial leverage risk/ firms wacc/ balance sheet risk
I'm sure I can come up with more if I think about it.

Not saying one shouldnt own gold stocks, only its not apple to apples.

[Dave]

Generally gold producing stocks are considered to be more volatile than actual gold as they involve using leverage. This should theoretically cause them to increase or decrease at greater rates than gold prices.

[Brandon]

Gold mining stocks also do not track gold prices that well (or at all at times). The better advice is likely to be funds such as ALU or GLD, or possibly GTU. They each have issues, but they're better ways to track gold than mining stocks IMO. Gold is best as a stabilizer in the portfolio, as it has low correlation to other types of assets, and can be used in certain climates to...stabilize the portfolio.

[David]

First, let's be straight about one thing. All investment is speculative. A capitalist system requires some level of inflation to operate (note how hard the world's financial systems scrambled to avoid deflation, with the jury still very much out). As a result, the investor must speculate with his or her money in an attempt to receive a return above the level of inflation.

Gold's speculative potential derives from concerns about inflation, meaning concerns about the the purchase power destruction of fiat currencies. Additionally, and importantly, precious metals like gold are on the very short list of financial assets that are not simultaneously someone else's liability. In short, gold is first and foremost an inflation hedge. Closely following its hedging value is the fact that--held in physical form--it is not something that someone else can default on.

Gold mining stocks are nothing like gold itself. The author of this article is all wet: such stock plays are highly speculative. Many gold companies are exploring for gold, not actually mining gold. Only a few actually produce gold, and even the biggest producers are highly volatile, because the price of their product fluctuates constantly and strongly. Most importantly, these stocks can be defaulted on by the mining companies. They can suspend their dividends. They can go out of business.

If you have any interest in investing in precious metals you should hold them in physical form. If you are instead interested in purchasing stocks, there are far less speculative stocks to purchase than gold mining stocks.

[Rob]

The safest way to invest in gold is to not invest in it at all.

[MasterPo]

IMO you don't buy gold for the same kind of investment return as you would stocks.

Gold is truly a buy&forget investment. You buy it now (physical gold), put it someplace safe, and forget about it until some significant national or world event happens. Maybe never, in which case you just hand it down to the next generation.

If you do trade it and make money consider yourself lucky.