Invest in the gold mine or invest in gold?

Gold is on track to become Australia’s third largest export commodity in 2021. And with the price of the precious metal remaining strong, investors continue to back gold stocks heavily. But is it smarter to invest in the gold mine or directly in gold?

For centuries, gold has been the safe haven investment of choice.

In times of uncertainty or fear, when the world confronts geopolitical conflict, economic and market volatility — during a worldwide pandemic, for example — buying gold as a physical asset holds great appeal.

It was a clear pattern in 2020, when a flight to gold saw its price rise more than 25 per cent, and the forecast for 2021 is another strong year.

But the prospects for gold mining are also looking more positive in 2021, with production tipped to increase by as much as 8.0 per cent in 2021, according to Australian Government estimates, and by 2.0 per cent in 2022.[1]

So, what should you consider when weighing up your investment choices?

Are there advantages to opting for paper gold — which might include stocks in gold mining companies, Exchange Traded Funds, certificates, futures, options or CFD trading — instead of a physical store of the precious metal?

Weighing up the risks and the prospects

When it comes to building a balanced or diversified portfolio, most investors are conscious of weighing the risks associated with returns.

As with all investments, lower risk options offer greater security, higher risk options potentially promise stronger returns.

“It's important to understand your goals and your risk profile,” says Jordan Eliseo, Manager, Listed Products and Investment Research at The Perth Mint.

“Different investors will have very different priorities and they need to seek advice on what matters to them.”

In general terms, physical gold traditionally tends to be a more stable option for a portfolio, less subject to market risks than stocks, and investors have the comfort of a physical store of wealth in gold bullion or gold coins.

When it comes to insuring against falls elsewhere in the portfolio, it becomes an attractive investment choice.

And gold has delivered when it comes to returns.

During times of heightened market volatility and political and economic uncertainty, physical gold has proven to be a sound performer and a solid counterweight to uncertainty and market risk.

Over the past 10 years, the AUD gold price has seen an average annual increase of 10.9 per cent.[2]

Conversely, gold stocks and trading options tend to respond to higher prices more slowly, and traditionally perform best when the gold price has enjoyed sustained improvement over several quarters.

“Gold tends to be a far more stable, simple and ultimately, over the long run, safer investment,” Mr Eliseo says.

“Gold mining companies can be very profitable, but they are typically higher risk, and there are far more moving parts for an investor to consider just as investing in any company does.

“Gold is much more about wealth protection and relatively steady, long-term growth, whereas the gold mining equity side can be more rewarding sometimes, but also a riskier place to be.”

Investing in gold mining

In the past decade, investors have enjoyed relatively strong returns from a range of gold investments. In the wake of the 2008 global financial crisis, financial institutions across the world began to build up healthy reserves of gold as a hedge against market turmoil, and investors returned to gold stocks as the gold price gradually strengthened.

As the gold price continues to remain high, investors have also backed smaller cap exploration companies along with the trusted names in gold mining.

Gold exploration expenditure in Australia reached a record high of nearly $1.2 billion in 2019-2020,  with almost 70 per cent of this total spent in Western Australia.

And in addition to new greenfield projects, companies have also begun returning to some historic brownfield mines to boost production and maximise returns.

With more than 75 operating gold mines, Australia is home to some of the world’s biggest and most successful mining companies. But as with all stocks, investor due diligence is critical.

While, in general, gold stocks can be related to the price of physical gold, Mr Eliseo warns they are also subject to market forces and other risks, making them potentially a more volatile proposition.

And the fates of individual companies can also be materially impacted by the quality of management and will always remain subject to the vagaries of the stock market.

“The value of a mining company is not just about discoveries,” he says.

“Does the company run efficiently? What are their average grades? What are the production costs? There are so many risk factors that have to be considered.

“If you get it right, and you buy the right exploration stock that literally hits a goldmine, then you're going to make many times what you would have made in gold.

“But if you get it wrong, that company might go bankrupt, or drop 90% of its value and never recover. Gold just doesn't have those kind of risk factors.”

ETFs on trend

While some investors may opt to take a stake in individual gold miners, there has also been increasing demand for Exchange Traded Funds (ETFs), managed funds that either track gold stocks or the gold price itself.

ETFs usually offer low-cost diversified investment opportunities for investors, and can be bought and sold at short notice, making them flexible for trading and hedging.

ETF demand for gold hit record highs [3] in 2020, accounting for two-thirds of investment demand [4] in the first three quarters, a new record according to the World Gold Council.

They trade at a unit price on the stock exchange like ordinary shares and can be a cost-effective and simple way for investors to gain exposure to an asset class like gold and diversify their portfolio.

How to buy gold in a bullish market

If investing directly in bullion is the path you choose, what is the best way to invest in gold? [5] 

Traditionally, investing in physical gold meant buying either bullion coins or bullion bars.

Gold coins have long been a popular investment choice, with the value store in both the physical weight of the coin and its value as a collectible.  In addition to the enjoyment of acquiring and curating a unique and personal collection, coins offer an affordable option for investors looking for direct exposure to the gold market.

Cast gold bars, which have a rough texture and are made in a mould, and minted gold bars, which have a clean and shiny finish and are produced from rolled cast bars, are also popular choices for investors.

Secure vaulting is obviously essential, particularly for large investments in physical gold in the form of minted or cast bars. The Perth Mint’s network of vaults is the largest and most secure in the southern hemisphere, capable of storing tonnes of precious metals.

Given its security, a unique government guarantee that backs the value of all stored precious metals, and WA’s safe geopolitical environment, the Mint currently cares for more than AUD 5.7 billion of gold and silver, on behalf of over 30,000 clients in over 120 countries.[6]

Digital delivery

To compete with other convenient forms of investing, digital platforms have emerged to make investing directly in physical gold easier than ever, enabling investors to buy and trade in gold at the click of a button.

GoldPass is Perth Mint’s investment platform that allows investors to securely buy and sell physical gold via digital certificates, allowing instantaneous transfer of gold to other GoldPass users.

Trading apps such as GoldPass have made it possible for investors to quickly redeem their metals for cash, providing a more liquid and tradeable option than previously available for investors in bullion or coins.

Mr Eliseo says GoldPass also gives an investor the capacity to transact gold in either Australian or US Dollars, making it an excellent option for global investors or those wishing to gain exposure to gold in USD terms.

“We have seen a clear trend by new and younger investors looking for digital trading options for gold, and the convenience fits exactly with their expectations of how they want to trade,” he says.

“Security and peace of mind are still critical but investors also increasingly want immediacy, convenience and accessibility.”

Invest in the Mint itself

A further option for investors is to consider Perth Mint Gold  (ASX CODE: PMGOLD), which is a right to gold created by The Perth Mint, so investors can purchase Government-backed gold via the ASX. It’s an option that suits investors who want their gold investment to be managed within their stockbroking account,

The right can be physically redeemable for bullion bars, unlike many gold exchange products.

It is also highly liquid, with PMGOLD tracking the international spot price of gold by maintaining bid and offer prices and volume on the ASX at all times, in accordance with ASX rules.

“PMGOLD has been by far one of our fastest growing products, mostly driven by self-managed superannuation funds,” Mr Eliseo says.

“Trading online digitally is totally within the remit of SMSF investors and from that perspective, PMGOLD is the easiest product for them to use.”

Why settle for one option?

Before settling on one asset at the expense of another, Mr Eliseo says the importance of a diversified portfolio should not be underestimated.

Instead, he says balancing an interest in mining stocks — or other Australian equities — with gold in a digital or physical form has much to recommend it.

“I don’t think people who are looking at investments should see them as one or the other,” he says.

“It’s like say, should you buy a house or buy shares in the bank? They might have similar elements but they are totally different investments.

“There’s room for both in a portfolio, and they should not be seen as interchangeable assets.”

As 2021 shapes up to be another strong year for gold assets, the options for investing in gold — whether in bullion bars or coins, digital certificates, exchange traded products, rights or shares — have made it easier than ever to gain exposure to the asset class. Whichever path you choose, gold is not to be ignored.

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