Commodity Investing

Physical Gold vs. Gold Stocks: An Introductory Guide

Many investors seek to purchase gold, especially in times of market uncertainty. But they often wonder which is better: investing in physical gold vs. gold stocks. In this article, we will look at the differences between each type of gold investment.

Either way, gold can be a great place to invest, as it is often used as a hedge against a struggling stock market – owning a physical asset like gold can seem very attractive when the stock market is down. So in these particularly turbulent times, it may make sense to put some of your portfolio in gold or gold stocks.

Of course, any investment has some risk, and gold-related investments are no different. So as always, it’s important to know as much as you can about the asset you are investing in.

Which do you prefer: physical gold vs gold stocks? Pictured here is a bar of gold sitting on a one hundred dollar bill.

Physical Gold vs. Gold Stocks – What’s the Difference?

There is a major difference between investing in physical gold vs. gold stocks. Generally, when you are investing in gold, you are investing in bullion, and you’re directly purchasing the precious metal itself in the form of gold bars or coins. On the other hand, when you invest in gold stocks, you’re purchasing a stock like any other.

Generally, gold stocks can be related to the price of physical gold, but gold stocks are also susceptible to other types of risk, as well as the broader stock market.

So which of these methods of investing in gold is better? Well, that really depends on your particular circumstances – for example, your investment goals and your risk profile.

Let’s take a look at each of the ways you can invest in our favorite shiny yellow metal.

Three Ways to Invest in Gold Stocks (Also Known as “Paper Gold”)

There are several different ways that you can invest in gold stocks (vs. physical gold). The following are your main options:

  • Mining stocks
  • ETFs
  • Gold certificates.

1. Gold Mining Stocks

A gold mining stock represents a share of a company that mines for gold. It’s a liquid investment that you can purchase on a stock exchange just like any other stock investment.

2. Gold ETFs

A gold exchange-traded fund (ETF) is a fund that trades on a stock exchange like any other ETF. However, a gold ETF is specifically invested in a variety of gold mining companies. Like other ETFs, it helps you gain instant diversification by spreading out your risk across multiple companies.

3. Gold Certificates

As the dollar is no longer backed by gold, this method of investing in gold is no longer as popular as it used to be. Not technically a stock, a gold certificate is an official paper that indicates you own gold that is not in your official possession. However, if the certifying company goes belly-up, your investment can become worthless.

Two Ways to Invest in Physical Gold

There are two different ways you can invest in physical gold (vs. paper gold):

  1. Gold bars
  2. Gold coins.

1. Gold Bars

There are two different types of gold bars: cast gold bars and minted gold bars. Cast gold bars are made in a mold, while minted gold bars are made by pouring molten gold onto a long strip of metals, which is then cut into bars.

There is a bit of a textural and aesthetic difference between cast and minted gold bars. Cast gold bars tend to be rougher and less perfect, while minted gold bars tend to be shiny, smooth and perfect-looking – and more in keeping with how you might imagine a gold bar to look.

The aesthetic appearance of the minted bars, along with the fact that they are often kept in their original packaging, helps them maintain both their appearance and their value over time.

2. Gold Coins

Another way to invest in physical gold rather than gold stocks is to invest in gold coins. Now, you might be imagining the kind of coins you’d find in a pirate’s chest in an adventure film. But gold coins are very real.

Gold coins are created in various mints around the world and are generally even usable as currency. That’s because gold coins often have a face value. However, the value of the physical gold composing the coin is often worth significantly more than face value, which makes the face value kind of irrelevant.

In addition to their nature as a store of value, gold coins can also have additional value as collectibles. This is especially true of gold coins minted in the United States prior to 1933 (which was the year gold coinage ceased its circulation in the U.S.).

Concluding Thoughts on Physical Gold vs. Gold Stocks

There is a significant difference between investing in physical gold vs. gold stocks. Gold stocks are more liquid and are easily tradable like any stocks, while paper gold is more susceptible to market risk than physical gold. As a result, physical gold can act as a hedge against the stock market and do well in a down market.

If you are interested in learning more about gold investing, why not sign up for our e-letter Wealthy Retirement in the subscription box below? It has more free information each weekday about how to build a great and diversified retirement portfolio.

The decision to invest in physical gold vs. gold stocks depends on your personal situation. But either way, investments based on the price of gold can help you balance your portfolio with an asset class different from non-precious-metal stocks and bonds.


About

Brian M. Reiser has a Bachelor of Science degree in Management with a concentration in finance from the School of Management at Binghamton University.

He also holds a B.A. in philosophy from Columbia University and an M.A. in philosophy from the University of South Florida.

His primary interests at Investment U include personal finance, debt, tech stocks and more.

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