If you are interested in investing in gold, there are several ways to invest.

The old fashion way is to just invest in the physical metal itself. You could buy gold in the form of bars, coins, or jewelry. You would have to consider insurance and/or storage costs and possible inconvenience. Also, the dealer will charge a markup when selling to you and apply a discount when buying from you.

Investing in Securities Instead of Physical Metal

A more convenient alternative is to buy securities related to gold.

For example, the SPDR Gold Trust (GLD) is the largest gold exchange-traded fund (ETF) that tracks the spot price of gold, but a drawback is that you can’t redeem gold for the underlying bullion GLD holds.

Some funds do offer redemption, but there’s a minimum requirement. If you don’t own enough shares to qualify, you can redeem for the proportionate amount of cash.

Beyond funds that track the market price of the metal, you can also invest in gold stocks, such as shares of gold miners.

Potential Drawbacks to Mining Stocks

Gold miners produce and sell gold. They make money when gold sales more than cover their costs.

However, there are unique risks to miners. It can take many years just to get the necessary permits to start building a mine and related infrastructure. In developed countries, satisfying environmental regulations is a common hurdle.

In less developed countries with more lax regulations and inadequate legal protection, the local government often wants to extract as much money from the foreign companies as they can. Corruption is not rare.

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Even after getting necessary regulator approvals, building a mine and additional infrastructure (if necessary) can cost a billion dollars or more, depending on the size and scope of the project.

Even if a mine reaches commercial production, plenty of factors can go wrong operationally. Human error, mechanical failure, and acts of nature can result in costly monetary losses and time delays. In places without stable governments, operational disruption due to violence and war have happened.

There’s another important concern. Even if the price of gold goes up, gold miners are not necessarily guaranteed to make more money. This is because during inflation, costs rise. If costs increase faster than gold prices, profitability falls. The worst scenario would be if gold prices fall but costs rise.

Therefore, when investing in gold companies, it’s crucial to analyze their production and cost profiles. Ideally, you want miners with high-grade deposits, good projected production growth, and below-average costs.

Leverage to Gold Without the Mining Risks

I want to bring your attention to another type of gold asset: royalty/streaming companies. These types of companies don’t operate any mines. They merely invest money in gold projects in return for either royalty payments or the right to purchase gold at a low fixed price from future production.

This type of company offers leverage to the price of gold but without much of the mining risks. To be clear, if a project the gold streamer invested in experiences operational delays, the gold streamer would still be hurt in that they would either get less gold or even no gold. However, because the company would invest in dozens or even hundreds of projects, their risk is diversified.

Secondly, if a gold streamer’s royalty is calculated based on a gold miner’s sales—rather than profits (a big difference)—then the streamer is not directly affected by rising costs. Same reasoning applies when a streamer buys gold at a predetermined fixed price. An investor interested in possibly investing in a gold royalty/streamer should look into how that company’s deals are structured.

Historically, the stock of the best gold royalty/streamer has outperformed not only the S&P 500, but gold, and gold miners (using a major gold miner ETF as proxy) as well.

Keep in mind that when miners are having a rough time, they become more desperate for outside funding. This opens up opportunities for gold royalty/streamers to swoop in and get favorable deals. Thus, even during down periods for gold, the gold royalty/streamer tends to hold up well.

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