While there are multiple ways to invest in gold, if you wish to look beyond direct investment in the precious metal and into allied sectors instead, you can think of gold mining stocks.
Just as oil refining companies benefit from an increase in the price of crude oil, gold mining company stocks gain or fall from an increase or decrease in gold prices.
Even ace investor Warren Buffett bought a stake in a gold mining company amid the pandemic, despite being known for his criticism on gold investment.
A regulatory filing from his investment company Berkshire Hathway in August showed that it had bought 20.9 million share investment worth $563.6 million in Barrick Gold Corp, one of the world's largest gold mining companies based in Toronto.
There was a lot of debate around this decision. Many questioned if Buffett had doubts on the US economy and therefore chose to park some funds in gold.
One significant observation from this investment decision from Berkshire Hathway (whether or not the decision was directly taken by Buffett), is that gold and gold stocks are two different types of investments that are impacted by different factors.
These stocks do not necessarily move in concert with bullion prices.
Understanding the difference
Warren Buffett has famously spoken of his dislike for gold investment. He said that the precious metal "gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility."
He further added that, "it's a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that."
Barrick Gold has several things that gold itself does not: a balance sheet, assets and dividend. Also, the company does not purely mine the yellow metal; it also mines copper. While an increase in the price of gold or copper will improve its possibility of earning higher profits, its business and hence its stock is dependent on its own performance; the expected future earnings of the company.
Like any company, it will succeed or fail on its operating performance,: how it utilises the capital it possesses to generate profits.
Effective management, production costs, reserves, mine exploration and project development, and hedging activities are some of the factors to be considered when deciding on buying gold mining stocks.
A gold mining company will "keep laying eggs" in the form of dividend income for its investors as well.
The higher dependence of the company on its own performance rather than purely on the price of gold is both good and bad in the long term; like any business tied to a commodity. For example, oil companies and even countries exporting oil have benefited from crude oil possession but some have failed to remain profitable.
Investing in gold mining companies from India
The gold mining sector has over 300 publicly companies but almost all are listed outside India. Most of these are listed in Canada, the US, the UK and Australia.
One way an Indian resident can invest in these global stocks is through mutual funds that invest in them.
DSP Gold Mining Fund is a popular feeder fund which invests in BlackRock Global Funds - World Gold Fund. The fund has minor exposure to silver, platinum, copper, nickel and diamond stocks but predominately invests in gold mining stocks.
You can look at other options as well.
One way to measure the performance of the fund is to compare it with the FTSE Gold Mines Index, that encompasses all gold mining companies that have a sustainable, attributable gold production of at least 300,000 ounces a year and that derive 51 percent or more of their revenue from mined gold. The benchmark index has been designed to reflect the performance of the worldwide market of companies whose principal activity is the mining of gold.
The article is purely informational and is not a solicitation to buy, sell in securities mentioned in the article. Greynium Information Technologies Pvt Ltd, its subsidiaries, associates and the author do not accept culpability for losses and/or damages arising based on information in this article.
About the author
Olga Robert is an M.Com graduate covering equity markets and personal finance for nearly three years. Her interests include tax planning, equities, DIY personal finance management and government schemes.