How to Find the Best Gold Stocks

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last updated 6 December 2023

Believe it or not, if you'd like to invest in gold, your best play might not be gold itself, but something a little more indirect: Gold stocks.

While owning the physical metal is the purest way of investing in gold, it's also the most cumbersome. You have to find somewhere to buy it (though, hey, you can get it at Costco), get it shipped, determine a secure way to actually store the gold, insure it, and then, when you're ready to sell, find a buyer and figure out how to deliver it.

If you're averse to butt pains, you've got a much easier method at your disposal: gold stocks. Because they're publicly traded companies, they don't give you perfect exposure to the price of gold – indeed, they often trade much more aggressively (in both directions) than the metal. But they're much more affordable on a nominal dollar basis, and you can buy them with a click of a button in your brokerage account.

So read on as we talk about what a gold stock is, why you'd want one, and what to consider when seeking out the best gold stocks.

What are gold stocks?

The term "gold stocks" simply refers to companies involved in the gold mining process. And, generally speaking, there are three types of gold stocks:

Miners: Gold miners are companies that are actually involved in extracting gold out of the earth. Miners typically develop a mining facility, mine the gold – which involves extracting ore and then processing it into gold – then sell the metal to buyers, who will use the gold to make anything from coins and bars to jewelry to electronic components.

Junior miners: Despite the term "miners," junior gold miners don't actually mine for anything. They're exploration companies that search out potential gold deposits and determine feasibility of the mines. Gold miners then buy these assets from the juniors – and from time to time, they'll buy the junior firms outright.

Royalty companies: Royalty companies never get anywhere close to physical gold. Instead, these firms provide financing to miners, who in turn agree to pay the royalty company either a percentage of revenues or gold production.

In all cases, the price of gold has a lot of sway on how these stocks perform. High gold prices mean higher selling prices for miners, higher deposit sales prices for junior miners, and higher royalties for royalty companies.

In fact, the metal's price impacts gold stocks' financial situations so much that miners' share prices tend to trade much more drastically than the metal itself. And given that juniors are typically a much more high-risk, high-reward proposition than actual mining companies (which also tend to be larger), juniors typically trade in an even more exaggerated fashion.

One of the clearest illustrations of this: 2016, when gold prices rose for a half a year before pulling back.

price chart of gold etfs GDX, GDXJ and GOLD

This dynamic exists for better or worse. Consider this Goldman Sachs observation about gold miners from late 2023:

"Across the gold space, the gold miners in our coverage have underperformed the commodity by 14% year-to-date, driven by idiosyncratic factors (i.e. capex increases, M&A, operational execution challenges)."

How to find the best gold stocks

While gold prices are arguably the most important factor behind the price movement in gold stocks, it's not the only one. Asset quality, company quality, management ability, and more, set one gold stock apart from the next.

If you're looking for the best gold stocks, here are a few things to consider:

All-in sustaining costs: All-in sustaining costs (or just all-in costs) are the total costs of producing an ounce of gold. These include materials, labor, taxes, royalties and more. In general, the lower the all-in costs, the better. Think of it as protection against lower gold prices. For example, let's say Gold Miner A has all-in costs of $1,200 per ounce, and Gold Miner B has all-in costs of $1,400 per ounce. Even if gold dropped from current prices around $2,100 per ounce to $1,300 per ounce, Gold Miner A's profit margin will be much smaller, but it will still be profitable – whereas Gold Miner B will actually be producing gold at a loss.

Exposure to other metals besides gold: Exposure to other metals isn't inherently a good or bad thing – it's merely a consideration as you're selecting an individual gold stock to buy. If you want a company that can best help you leverage the price of gold, you probably want a pure-play gold miner. However, if you want a diversified company that can perform well if gold prices rise, but won't necessarily crash if gold prices do, you might want to consider a miner that deals in multiple metals – say silver, platinum, iron, nickel, etc.

Individual stocks vs ETFs: It can be exceedingly difficult for beginner investors to tell one gold stock from another. Also, even though gold stocks hinge greatly on gold prices, it's possible to pick a poor individual producer. So, rather than single out one or two mining stocks, you might consider owning dozens through an exchange-traded fund. Two of the most popular gold ETFs are the VanEck Gold Miners Equity ETF (GDX), which holds large, established gold miners, and the VanEck Junior Gold Miners ETF (GDXJ), which, as the name suggests, owns juniors.