How to Invest in Gold Stocks: 3 Options You Should Consider – Motley Fool

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Gold has attracted interest for millennia, and even today, investors like the idea of a physical store of value that can protect against the inflationary pressures that periodically plague monetary systems. Although there are smart ways to invest in gold as a commodity, many investors prefer the potential for growth and income that gold stocks provide.

Three different methods of investing in gold stocks make sense for most people who are interested in the gold market, and each has its advantages and disadvantages. Whether you choose gold mining stocks, gold streaming and royalty companies, or exchange-traded funds that focus on gold stocks, you can get valuable exposure to the yellow metal and benefit when its price rises.

Gold Stock Investment

Category

5-Year Average Annual Return

Goldcorp (NYSE:GG)

Mining stock

(7.7%)

Newmont Mining (NYSE:NEM)

Mining stock

(3.6%)

Franco-Nevada (NYSE:FNV)

Streaming/royalty stock

(1.2%)

Royal Gold (NASDAQ:RGLD)

Streaming/royalty stock

(0.2%)

VanEck Vectors Gold Miners (NYSEMKT:GDX)

Gold stock ETF

(5.9%)

VanEck Vectors Junior Gold Miners (NYSEMKT:GDXJ)

Gold stock ETF

(6.7%)

Data source: Yahoo! Finance.

Mining stocks

Gold mining stocks offer exposure to gold prices, but they also introduce the opportunity and risks involved with mining operations. Specific mining assets can pan out better or worse than anticipated, and when that happens, stocks can rise or fall regardless of whether the price of gold climbs or declines. Larger gold mining companies have a wider array of assets that help diversify their overall portfolios, leaving them less vulnerable to problems at any one particular mine.

Goldcorp is one of the world’s largest gold producers, and the Canadian company has high hopes for further growth. After producing almost 2.9 million ounces of gold in its 2016 fiscal year, Goldcorp hopes to boost production to between 3 million and 4 million ounces within the next four years. Its key mining properties include the Eleonore mine in Canada, the Cerro Negro mine in Argentina, and the Penasquito mine in Mexico. In addition, Goldcorp hopes to keep boosting its reserves by further developing existing holdings and looking for smart strategic acquisitions. With anticipated declines in its already low all-in sustaining cost structure, Goldcorp plans to focus on its most efficient operations to maximize profit even if gold prices don’t improve from current levels.

Newmont Mining also has an impressive list of assets, and it, too, has worked hard to boost production. The U.S. mining company began gold production at its Merian mine in Suriname and the Long Canyon mine in Nevada. Strategic moves such as divestitures of non-core assets have helped Newmont pay more attention to its highest-margin mines, and further expansion plans in areas such as Ghana and Australia could help it reduce average gold production costs while increasing production.

Gold bars stacked into a pyramid shape.

Image source: Getty Images.

Streaming companies

Streaming companies use a different business model than mining companies. They provide financing to mining companies by entering into streaming agreements, under which they obtain the right to buy a certain percentage of gold production from their mining company client in exchange for upfront cash to help fund operations. When gold prices rise, the value of their streaming interest typically goes up. Moreover, when production levels rise at mines under which they have agreements, streaming companies benefit as well.

Franco-Nevada is a leader among streaming companies, with agreements covering more than 250 mining assets in exploratory, advanced-stage development, or full production mode. The company has boosted its exposure in recent years, taking advantage of poor pricing to offer money to cash-strapped mining companies. Franco-Nevada believes that the energy markets could be even more lucrative for its business model, and it’s shifting a greater percentage of its portfolio toward oil and gas royalty interests. Nevertheless, precious metals exposure will remain important, and Franco-Nevada is in position to benefit.

Royal Gold has a similar business model and a strong list of streaming arrangements as well. With a portfolio of 60 mines in areas such as Canada, Chile, Mexico, and Ghana, Royal Gold has extremely strong margin figures and has hit new records for revenue and cash flow in recent quarters. Attractive valuations and a future strategy emphasizing further growth make Royal Gold a good-looking play in the space as well.

Gold mining ETFs

Exchange-traded funds give you the opportunity to own a broad set of stocks with a single investment, and the two gold mining ETFs offer different types of exposure to the industry. The VanEck Vectors Gold Miners ETF focuses on the largest companies in the business. You’ll find Goldcorp, Newmont, Franco-Nevada, and Royal Gold among its holdings, along with several dozen other stocks. By owning shares in roughly 50 different mining companies, the ETF minimizes the risk of any one company dealing with an unexpected catastrophic event.

Investors who are interested in smaller gold miners might prefer the VanEck Vectors Junior Gold Miners ETF. This fund focuses more on the smaller plays in the industry, and although two-thirds of the portfolio is invested in what most people would consider mid-cap stocks, the fund has a track record of moving more aggressively in either direction in response to changing gold prices.

Pick your favorite gold stock investment

Investors have different comfort levels with gold stocks, and these three ways to invest in them offer a nice range for you to consider. Depending on what you want from your portfolio, one of these three gold investments could be exactly what you’re looking to add.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.