For young investors, gold-mining stocks might be a smarter buy than bullion. Gold boosters recommend bullion as the ultimate secure investment, but many financial advisers say stocks are worth the risk if you're young enough to ride out any market slumps. Gold-mining stocks, or mutual funds that invest in them, offer potentially higher returns than buying gold itself, though the returns come with a higher degree of risk.
Stocks Vs. Gold
When gold value goes up, gold-mining stocks go up even more -- sometimes as much as three times more -- because of the boost to mining-company profits. The catch is that when gold loses value, stocks could also drop up to three times as fast. Successful mining companies can cut losses, however, by cutting costs. And if stock prices go down, that makes it more affordable to buy more stock, anticipating that the price will rise again.
Investing in a gold-mining company is like investing in any stock: You have to do your homework if you want to see a good return. Before you invest, find out if the company you're looking at has a history of steady production. Read the company's annual reports and learn if they're laboring under a mountain of debt. Research the current managers and their track record. If a company's fundamentals are sound, that's a good reason to invest.
The Down Side
Gold isn't a bulletproof investment by any means. In 1980, gold hit a peak at $875 an ounce, according to Kiplinger, then either sank or stayed stagnant for almost 20 years. It bottomed out in 1999 at $252.80 before prices finally began climbing again. If gold slumps again, so will the demand for gold, and mining companies' profits and share prices will drop, too. Some companies don't prosper even when the price is going up, such as new gold-mining ventures that discover they don't have any gold on their property.
The Asia One finance website says while good mining stocks offer a better rate of return than gold, buying bullion is still a good hedge if you want to balance the risky investments in your portfolio. Rare coins and jewelry aren't as good an investment, as the price is based on more than the value of the metal itself. Exchange-traded funds invest in bullion for you. With an ETF you don't have to worry about storage and security for your gold, but fund fees and expenses cut into your gains.
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