How To Invest In Gold Bullion & Gold Mining Stocks

Dr. Stephen Leeb, PhDLeeb Capital Management

How To Invest In Gold

When it comes to investing in gold, there’s good news and bad news! The good news is that you have a lot of choices. The bad news? You have a lot of choices

You can buy 99.999% pure physical gold bullion in the form of gold bars or gold coins from a refinery or mint. You can invest in a gold ETF or mutual fund. You can buy shares in gold mining stocks such as a big-cap miner or junior miner, for example. Additionally, you can also buy gold futures and options. It’s all wide open, and especially if you’re new to gold investing, these choices could leave your head spinning!

Albeit gold tends to be an investment hedge, there’s a lot of potential profit which may exist in all of the aforementioned possibilities. But there are pros and cons to each. The truth is, there’s no one right way to invest in gold, though I feel there are a few ways better suited to offset risk.

But not to worry. There are safe and viable ways for you to invest in gold, which largely depend on your own personal preference and financial goals. And after reading this article, you may decide investing in gold just isn’t for you. Either way, it’s always good to self educate and understand your options.

How To Invest In Gold

Tips For Investing In Gold Bullion

For starters, there are two broad categories to consider (and it’s fine, indeed a good idea, to invest in both): physical gold and gold mining companies. In this article I focus on the ‘ins and outs’ of investing in gold.

A lot of gold enthusiasts feel the same way, that nothing beats actually owning physical gold, or bullion. Are they right? In many ways, you can’t argue with them. Owning physical gold has a lot of merit and will be a surefire – and in some respects the safest – way to benefit from gold’s potential gains. But it also has some undeniable hassles and isn’t for everyone. To help you decide if it’s right for you, here are some of the basics.

What About Storage…

Before considering whether investing in physical gold bullion is the right option for you, it’s important to consider the issue of safe storage. Many people entertain the thought of buying gold and silver bars or coins but reconsider after realizing that storage can be both a hassle and costly. For security reasons, it’s not a good idea to store physical bullion at your personal residence, regardless of whether or not you have a safe. Furthermore, due to the potential risk of bank seizures, storing bullion in a safety deposit box at your local bank is probably not a wise idea either, as banks can seize your personal assets in the event of a bail-in. Likewise, you also have the option to store your bullion at an IRS approved depository like Brinks, for example. Again, the United States constitution does not protect an investor from the seizure of personal assets such as bullion stored at a depository in the event of a catastrophic economic event. Additionally, storing bullion at any depository will charge you monthly/annual fees for that storage. Lastly, there are public private vaults of which are not IRS approved where you can safely store your bullion, protected at least from government seizure. Private vaults may seem like the best option but typically charge higher fees for privacy while dually offering non-allocated, segregated storage. This means that your personal bullion is segregated and separated from being comingled with other bullion stored at the facility. Meanwhile ‘non-allocated’ represents the fact that your personal bullion does not sit on the private vaults’ balance sheet. These are all serious factors to consider and ultimately it’s up to each individual investor to decide which option is in their best interest.

How To Invest In Gold

Gold Bars, Rounds, and Coins

The first thing to realize is that even if you like the idea of owning physical gold, you still have more choices to make. Physical gold comes in different forms: bars, coins, and rounds. Coins are further subdivided into the collectable/numismatic type and contemporary coins.

Mints Verses Refiners

All these forms of gold come in various weights and dimensions and are produced by mints and refiners around the world. One important distinction is between mints and refiners. Mints are either fully or partly government-owned. They are the only entities officially authorized to produce coins that are recognized as legal tender.

These coins have a face value, but their actual value is far greater because of the intrinsic value of the gold that constitutes them. A few of the best-known mints include- in no particular order:

United States Mint

Royal Canadian Mint

Perth Mint of Australia

South African Mint (Rand Mint)

British Royal Mint

The most widely popular coins are the American Eagle, the Canadian Maple Leaf, and the South African Krugerrand.

Refiners produce bars and rounds (both of which mints can produce as well) but not coins. Rounds are similar in appearance to coins. But they aren’t recognized as legal tender, since they are issued by private refiners that don’t have a relationship with the government. A few popular refiners include PAMP Suisse, Engelhard, and Credit Suisse.

Understanding Gold Spot Price Flux

Prices of all these forms of physical gold are determined by the spot price, which is derived from the Comex futures market and the London Gold Fix. All bullion products rise and fall in value in accordance with fluctuations in the spot prices. The products sell at a premium to the spot price, with the spread typically narrowing during bear markets in gold and widening when gold is up trending.

How To Invest In Gold

Coins normally sell at a premium to bars. The spread in price between the two usually widens when gold is trending upward and narrows when gold is trending downward. During 2018, when gold was experiencing a correction, the difference between a one-ounce gold bar produced by the Royal Canadian Mint and a one-ounce Maple Leaf coin was $10. The difference was more than $100 dollars in 2011 when gold hit a peak.

Older gold coins tend to cost more than more recent ones. In addition, coins issued in certain years or with special designs may be more valuable than standard coins from the most recent year. This may be of particular interest to those who prefer numismatic gold bullion coins.

Which Option Do I Choose?

Choosing between coins and bars depends in part on what quantity of gold you’re looking to buy. Most coins come in weights of one ounce or less, while bars range in size from one gram to 400 ounces. Because you pay a premium for buying coins, buying a large bar lets you get the most gold possible at the lowest cost. As an illustration, if the spread between coins and bars is $50 per ounce, and you want to buy 10 ounces of gold, you’d pay $500 more just to get that gold in the form of coins rather than in a bar.

But coins have some advantages over bars. If you’re looking to buy just a small amount of gold at a time – a fraction of an ounce – they’d be a natural choice. In addition, it may be easier to sell coins if you need to cash in. With bars, you may have to offer proof of their purity. Some dealers may require that you pay to have the bars fire assayed, meaning melted down so as to validate that they reach the requisite level of purity. Or they may test them by newer methods, such as x-ray scanning, ultrasound, or acid testing.

You can avoid having to worry about proving purity if you buy bars that come in a sealed plastic security case with serial numbers and/or an assay certificate containing bar codes. Look for bars that state they are “In Assay.” In general, there’s no issue if you stick with bars that are no more than 10 ounces in weight, manufactured by one of the major mints. And the path is even smoother if you sell the bar back to the dealer you bought it from (make sure you retain the receipt).

If you’re new to gold buying but like the thought of owning physical gold, I’d suggest the most straightforward approach is to stick with coins produced by a reputable refinery or mint and not look for what might seem like better deals from various bullion dealers. It’s worth paying the premium to be assured that you’re getting what you think.

The Upside of Investing In Gold Mining Stocks

It’s not hype. Honestly. In a major bull market in gold, if you invest in the right mining companies, you can ultimately make forty to fifty times your money. Maybe even more. Of course, there are no guarantees. You might make “only” twenty times your initial investment, in one mine or overall. And some mining operations might potentially run into environmental permit problems, go bust or turn out entirely to be a poor investment.

When it comes to investing in gold, the best-situated miners offer the greatest leverage to gold’s gains. They’re easy to buy. Some even pay a dividend. You have a range of choices, from the more speculative junior miners to large-cap companies with a proven record of production. Even if you want to own physical gold bullion, I’d suggest investing in some miners as well. Always best to diversify!

The key, of course, is to pick the right miners, and to be sufficiently diversified amongst them so that if one or two don’t pan out, you’ll still be poised for some return on your investment. Identifying the right gold mining company isn’t a matter of luck. Below, I have outlined sensible guidelines for evaluating miners of all sizes for both safety and potential.

How To Invest In Gold

What To Look For… Rule #1

An essential rule when evaluating mining companies is to have knowledge of, and confidence in, the experience, knowledge, and integrity of its leaders. That’s important in any investment, of course. But it’s particularly critical with junior miners, because so much of what will determine their success is, literally, concealed deep underground. Above all, I look for miners whose bosses have great long-term records in the industry.

Rule #2

A second guideline is to focus on junior miners operating in geopolitically safe regions, keeping them shielded from chaos or threats of government expropriation. That narrows the field, but – with an occasional exception – it’s not worth incurring the risks of investing in regions that are particularly vulnerable to violence or other types of disruption. Of course, to some extent, this is a moving target. Chile, for instance, is blessed with natural resources and until recently was considered one of the most politically stable countries in South America. But the large-scale protests that have recently erupted there have modified that calculus.

In the end, with the miners as with any investment, you’re weighing risks against potential rewards. In the case of any mining stock, the potential rewards range from zero to mega-big.

When seriously considering investing in a mining company, keep in mind there are three basic categories:




Investing In Gold Junior Miners

The gold investments with the biggest potential rewards are the small mining companies known as junior miners. These are companies that own or have significant stakes in properties known to contain gold and often other precious metals but haven’t yet started mining operations. Many are still in the midst of the long and multi-stage process of obtaining necessary environmental permits, an inescapable task for any miner. Because they are not yet generating earnings, they may need to seek funding to keep the process going, to build the necessary infrastructure, and to conduct exploratory operations to determine the likely potential of their holdings.

But if investing in junior miners seems to require a certain degree of faith, the key is to make sure it’s not blind faith. Some junior miners will fall by the wayside, but the ones that make it will reward you many times over, greatly leveraging the rise in gold itself.

These are companies in which you can make multiples of your initial investment in a gold bull market as they go from money-losing companies to producers, in some cases achieving the ranks of major producers. To cut the risk factor, focus on miners with assets in politically safe regions. Even at current gold prices, each would be profitable shortly after beginning mining operations because costs of production, at below $1,000 per ounce, are far lower than what they’d get for their gold sales.

Mid-Cap Miners

The middle of the pack includes gold miners that are neither big nor small. But that doesn’t mean boring or mediocre. Look for mining companies that have established strong track records in every metric that counts, from increased production to rising reserves to earnings. Potentially, some may even pay a dividend. While their potential gains are likely less spectacular than for the juniors, a majority have a well-measured long-term target. It’s important the Mid-Cap Miner has a strong balance sheet, so that even if gold were to back off to $1,000, they’d still have enough cash to continue to generate growth in their reserves and resources. For investors, these medium-sized producers offer a nice trade-off: less speculative than the juniors but more upside potential than the majors.

Big-Cap Miners

For the greatest leverage to rising gold prices, the junior miners are your ticket. But there’s nothing wrong with owning the large-cap more established miners, either instead of the juniors, depending on how aggressive an investor you are, or alongside them. As with everything, there are trade-offs. 

Leverage to rising gold prices comes from the ability to increase production, and the juniors by definition will be increasing production since they are starting from no production. The bigger-caps will struggle to raise production and may actually see production start to decline. Still, as gold prices rise, the gold they continue to produce will bring in more money and generate rising profits. And because of their larger size, the bigger mining companies offer greater safety in the event of some out-of-the-blue catastrophic event.

Mining ETFs

An alternative way to invest in miners is an ETF that tracks the industry. For example; here are two typical ETFs that track gold miners.

The first example is VanEck Vectors Gold Miners ETF, which trades on the NYSE under the symbol GDX and encompasses 45 gold stocks including the major miners. Because it is weighted according to capitalization, the biggest miners count most. The three biggest – Newmont Goldcorp, Barrick, and Franco-Nevada – together account for roughly 30 percent of the ETF.

The second example is VanEck Vectors Junior Gold Miners ETF, which trades on the NYSE under the symbol GDXJ. While it has “junior” in its name, the VanEck ETF defines junior miners differently from common perception. Typically, a junior miner is one that hasn’t yet begun production. GDXJ, however, also includes some small miners that are already producing.

Wrap Up

So, there you have it. It’s entirely up to each individual investor whether or not they feel investing in gold is a prudent option for their overall investment objectives. Stay tuned for my next article, which dives deeper into the rewards and caveats of investing in gold ETFs.

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