Gold mining stocks: Investing in ASX gold stocks
They’re celebrated as a safe haven, but geopolitical shifts may affect mining profits.
Gold has always formed an important part in our monetary system. Starting out as a currency, it became a store of wealth that central banks used to back their currency and eventually an asset that traders used to protect their wealth.
These days, it might not play a role with central banks, but it is still used as a hedge against inflation by professional and retail traders alike.
What are gold stocks?
Gold stocks are stocks from companies involved in the mining and production of gold. The category is heavily dominated by mining companies, but investors in Australia can also back gold streaming and royalty companies – companies that fund mining efforts in exchange for the opportunity to buy gold at a set price in the future.
In some instances, these mining companies will be exclusively mining gold; in others, they will mine other minerals.
Gold stocks are one way for investors in Australia to gain access to this historically significant commodity. There are also other ways to invest, including gold exchange traded funds (ETFs) and purchasing physical bullion and coins.
Why invest in gold stocks?
Gold stocks can help diversify and stabilise your portfolio while simultaneously representing the cultural and historical significance of gold.
Simply put, gold is valuable.
And while there are other ways of investing in the commodity, gold stocks have a distinct advantage. They are a listed business.
While you could buy gold as bullion, you need to find a place to store and secure the gold. Should something happen to it, that becomes your issue. Gold stocks have fewer of these security risks.
Another reason to buy gold stocks is simply because of the underlying asset they mine.
Gold was valuable thousands of years ago, and it’s valuable now. It predates modern currency and its price tends to move independently of the stock market, strengthening its diversifying properties.
Historically, the price of gold has risen in tandem with the cost of living. This makes it a powerful hedge against inflation. It also tends to perform well in a down market as people fall back on the security of gold and cash in times of economic uncertainty. For an example of this phenomenon in action, look no further than the 1930s — when the market crashed, the purchasing power of gold skyrocketed.
With its ability to weather highs and lows and its inverse relationship to stocks, gold makes for a solid portfolio stabiliser.
Finder survey: What types of ETFs do Australians of different ages hold?
| Response | 75+ yrs | 65-74 yrs | 55-64 yrs | 45-54 yrs | 35-44 yrs | 25-34 yrs | 18-24 yrs |
|---|---|---|---|---|---|---|---|
| Cryptocurrency | 1.49% | 0.56% | 2.81% | 3.23% | 2.11% | ||
| Technology | 1.49% | 2.78% | 6.43% | 7.37% | 2.11% | ||
| Australian stocks | 2.29% | 0.62% | 7.22% | 12.05% | 14.29% | 10.53% | |
| High dividend | 1.14% | 0.62% | 2.22% | 2.01% | 2.76% | 4.21% | |
| Index fund | 1.14% | 1.23% | 6.11% | 12.85% | 10.14% | 4.21% | |
| Emerging markets | 0.57% | 2.78% | 4.02% | 3.69% | 3.16% | ||
| Other | 0.57% | 1.23% | 1.2% | 0.46% | 1.05% | ||
| Property | 0.57% | 2.78% | 2.81% | 0.92% | 3.16% | ||
| US stocks | 0.57% | 3.33% | 6.83% | 7.37% | 9.47% | ||
| Actively managed fund (hedge fund) | 0.62% | 0.56% | 2.81% | 3.23% | 2.11% | ||
| Ethical | 0.62% | 1.11% | 4.82% | 4.15% | 3.16% | ||
| Bonds | 2.22% | 2.41% | 1.38% | 2.11% | |||
| Leveraged | 1.11% | 1.61% | 0.46% | ||||
| Commodities | 0.56% | 1.2% | 0.46% | ||||
| Gold | 0.56% | 3.21% | 1.84% | ||||
| Inverse | 0.56% | 0.4% | |||||
| Oil | 0.56% | 1.2% | 2.3% |
Source: Finder survey by Pure Profile of 1145 Australians, December 2023
How is it a hedge against inflation?
Inflation hedging can help protect the value of your share portfolio and other investments by working as insurance against falling prices. For example, take a share that rises by 2%, while inflation is at 3%. In this situation, you are actually losing 1% after inflation.
However, gold might not be a hedge year-to-year. The performance of gold doesn't always outperform inflation, although, over a number of years, it has traditionally been a hedge against inflation.
During periods of inflation, the costs of consumer goods increase and become more expensive, meaning the dollar value per item decreases. Since gold is dollar-denominated, its price also increases in line with the rising inflation.
The higher the price of gold, the more money miners of the commodity can get per unit. As such, it should help grow the underlying stock.
What ETFs track the gold category?
Stocks aren’t the only option for investors in Australia interested in gold – there are numerous ETFs that track the gold category. These ETFs follow numerous sub-categories of the industry, including mining companies, exploration companies and the asset itself:
- VanEck Vectors Gold Miners ETF (GDX)
- BetaShares Global Gold Miners ETF (MNRS)
- BetaShares Gold Bullion ETF (QAU)
- ETFS Physical Gold (GOLD)
- Perth Mint Gold (PMGOLD)
Outside of stocks and ETFs, there’s also the option of purchasing physical gold, including coins, ingots and bars. If you plan to buy physical gold, make sure you have a secure place to store it before you invest.
Risks of investing in gold
Remember, an investment in gold stock is not the same thing as an investment in gold bullion.
Instead, you own part of a company that mines gold. That means you need to be wary of both how the company is performing and the price of the asset. This is because, at a certain price, gold is profitable for miners after the cost of production. Fall below that price and the businesses you've invested in are losing money.
Most gold stocks are vulnerable to the same risks as other mining stocks, namely economic shifts, geopolitical changes and natural disasters.
Where a mine is located factors heavily into its potential profitability, with many mining companies managing international operations. The political climate of the country in which a gold mine is located can affect material prices and a business's processes.
Gold mining companies also need to contend with Mother Nature. Natural disasters, while uncommon, may sideline mine operations for months, depending on the extent of the damage.
Share market fluctuations add to the potential risks. While the price of gold will have a major impact on the value of gold shares, it is not the only impact. Natural causes, geopolitical threats and general business impacts can all affect sentiment around a company and its share price.
Compare trading platforms to buy gold stocks
To buy gold stocks, you’ll need a brokerage account in Australia. Narrow down your options by comparing features and fees.
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Important: The standard brokerage fee displayed is the trade cost for new customers to purchase $1,000 of either Australian or US shares. Where a platform charges different fees for both US and Australian shares we show the lower of the two. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.
Bottom line
No investment is free from risk and gold stocks are no exception. Before you buy in, weigh the potential benefits against the risks to determine whether gold stocks are a practical addition to your portfolio.
Compare brokerage account features and fees to find the trading platform best suited to your investment goals and budget.
Frequently asked questions
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades. Read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the product on the provider's website.
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