Gold ETF vs. Mining Shares

by Tim Plaehn

An investor who wants to add gold exposure to her investment portfolio must choose from several types of investments. Investing in gold can be accomplished by buying gold coins or bars. However, these choices can be unwieldy. Gold investment choices using a stockbrokerage account include stocks in companies that mine gold, and exchange-traded funds, or ETFs, that track the price of gold.

Gold ETFs

The exchange-traded gold funds allow investors to buy fund shares that directly track the price of an ounce of gold. The major gold ETFs hold gold bullion to back the shares traded on the exchanges. These ETFs provide investors a way to buy, sell and trade the value of gold through their brokerage accounts. An investor buying shares of a gold ETF knows exactly how the investment will perform in relation to the actual price of gold.

Mining Companies

Mining shares are stock in companies in the business of mining gold. These companies range from giant, multibillion-dollar companies with large mines in Nevada, Canada, Australia and Africa to small exploration mining companies looking for new finds in remote parts of the world. The major minors are stable companies whose profits will rise and fall with the price of gold. Junior minors are more speculative. These small companies must find gold before they can mine and sell it. A junior mining stock can provide a tremendous return to investors if the company is successful. The company also might fail, costing shareholders their entire investments.

Rising Gold Prices

If the price of gold is rising, a gold ETF provides investors an easy, profitable ride along with the shiny metal. Studies have shown mining company profits increase faster than the increase in the price of gold. However, each company is different, and the mining company might have sold future production at a lower price or hedged the price of gold with futures trading. In a rising gold market, gold mining stocks will also go up, but the rate of increase can be faster or slower than the change in the price of gold.

Flat or Falling Gold Prices

A gold ETF pays no dividends, and it provides no growth potential to investors other than the price of gold. Mining shares can increase in value for investors even if the price of gold is not going up. A mining company can make money if gold stays level or even declines in value. It can increase shareholder value by paying dividends or increasing the production of gold. However, a large drop in the price of gold will pull the stock prices of mining shares down, if only temporarily.

About the Author

Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.

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