The price of gold is about $1,000 off of its all-time high, which was reached in January.
That gives investors who are bullish an opportunity to get in before it climbs again and makes a new high.
There are lots of ways to own gold.
You could buy physical gold like bars or coins, but then you have to keep it somewhere.
Coins are a little easier to store if you have a bank vault, though you have to pay for it every year. A home safe would probably do the job as long as it can’t be moved or broken into.
Bars are a little tougher to store. If you have a meaningful amount, then you need a sizable vault or safe.
You can pay to have them stored somewhere, but then you don’t physically have them, which is often the point of owning the actual metal.
Another option is the SPDR Gold Trust (NYSE: GLD). This ETF is backed by physical gold, and its objective is to track the price of gold bullion. Despite its expenses, it is a pretty good proxy for the price of gold.
However, there’s a better way to take advantage of an anticipated surge in gold: owning shares of gold miners.
Here’s why…
A miner has fixed costs to pull the gold out of the ground. If it costs $1,500 an ounce to mine the gold and gold costs $3,000, the miner makes $1,500. But if gold rises to $4,000, a 33% increase, the miner’s profit is now $2,500, or 67% higher. If gold reaches $6,000, or a 100% increase, the miner’s profit is $4,500, or 200% higher.
If all things remained equal, that should move the stock price of the miner sharply higher than the price of the metal. If gold rose 100% and the company’s earnings rose 200%, the stock should increase at a 2-1 ratio to the price of gold.
In reality, investors pay for earnings growth, so it’s likely that the miner’s valuation would increase even more.
If the stock were trading at 10 times earnings when gold was at $3,000, perhaps it would trade for 15 times earnings when gold rises to $6,000 and the company’s profits have tripled, boosting its outperformance even more.
This is why gold miners – especially smaller ones that suddenly see their profits soar – take off in gold bull markets.
The VanEck Gold Miners ETF (NYSE: GDX) is a way to get exposure to mining stocks.
It tends to hold larger stocks. The average market cap among its holdings is $48 billion.
Its largest holdings are the gold mining giants you are probably familiar with, such as…
- Agnico Eagle Mines (NYSE: AEM)
- Newmont (NYSE: NEM)
- Barrick Mining (NYSE: B).
Those three stocks make up 30% of the portfolio.
If you prefer to go smaller, you can invest in the VanEck Junior Gold Miners ETF (NYSE: GDXJ).
This portfolio has an average market cap of $9 billion, so we’re not talking real small cap stocks.
The top three holdings are…
- Alamos Gold (NYSE: AGI), which has a $16 billion market cap
- Equinox Gold (NYSE: EQX), with an $11 billion market cap
- Coeur Mining (NYSE: CDE), whose market cap is $18 billion.
To get the maximum leverage, I believe you want to go even smaller.
Do keep in mind, though, that the small junior miners have more risk. These are speculative stocks that have the potential to soar, but make sure you can handle the elevated risk.
When researching junior gold miners, look for companies that are already profitable with healthy balance sheets. That should increase your profits if gold rises and reduce your risk if it doesn’t.
If you like the idea of physical gold, there’s nothing wrong with it. Physical gold can give peace of mind.
But if big profits are what you’re after, look to the miners – especially the smaller ones – to take advantage of the next move higher for gold.
