Risk is inherent to finance. Even with insurance, no one is completely risk free. Risk is part of life, regardless of what we do — and that includes investing, as pretty much anyone who lost money in the last few years can tell you. In the last couple of years, gold and silver have been discussed without end on talk radio, financial TV, newspapers, investing blogs — pretty much all media is infatuated with precious metals. Is gold in a bubble? Is silver going to explode? Do precious metals outperform the dollar during times of recessions?
Photo by Giorgio Monteforti via Flickr
Many people say you should buy gold now, while others say you should wait. But if you decide that this is a good time to buy gold, what then? What’s the best way to invest in gold? In this post, we’ll be discussing an alternative way to invest in gold that doesn’t include gold futures or physical bullion — and just might include healthy dividend income.
Why Investing in Precious Metals is Often Frowned Upon
Investing in precious metals like gold is an extremely risky financial move. Buying gold at its peak, only to see its value diminish, means you lose your investment rather than gain it. And, given how volatile the price of gold has been in the last twenty years, you could lose over 70% of your investment — or more.
If you buy gold at its peak, and it won’t “re-peak” at that point again, then you can’t make money. You’ll never be able to get your money back that you invested. It’s essentially a checkmate.
The same goes for silver, platinum, and pretty much every other precious metal in existence. It’s risky. To profit at all, you have to sell your assets after the prices for your metals increases. If the price goes down, you can’t make money.
The inherent risk in buying commodities straight up has led investors to look for a more secure and less risky way to invest in rising precious metals costs. Below, I’ll be talking about a way to indirectly invest in gold that is safer. Of course, “safer” in investing is always a relative concept, and you’ll need to do the specific homework on your own.
How to Invest in Gold Indirectly Through Mining Stocks
In my opinion, the best way to invest in precious metals while cutting risk is to invest in precious metal mining stocks — silver stocks and gold stocks, for example. These mining stocks are superior from a risk-analysis perspective for the following reasons:
- Dividend Investing. Most gold and mining stocks pay dividends. These dividends essentially insure that you won’t lose money necessarily — your assets are paying you. Dividend investing means you can buy and hold with more security and profit. This also means you don’t have to time your exit out of the market – something that will save you headache and heartache down the line.
- Growth Investing. At the risk of sounding like a pesky “gold bug”, I’m extremely bullish on gold. The reasoning is simple: inflation is coming, according to people like Warren Buffett and Jim Rogers. And even if inflation wasn’t coming, gold production was outstripped by demand just from jewelers. In the last 5 years, jewelry-gold demand has outstripped new gold production by 500 metric tons per year. That’s a lot, and it’s only going to increase as the world population increases.
- Value Investing. Investing in just physical bullion doesn’t allow you to invest in companies that you know — it makes your ability to pick the “right” company diminished. By investing in gold companies, you’re given one more variable that, if you understand well, can help you profit more in the long term. You can research the gold mining companies and pick the one that makes the most sense. That’s more security and potential profit.
Risk-Free Investing Doesn’t Exist
Gold stocks, of course, also bring on other risks: accounting fraud, bad management, etc. While I believe investing in dividend paying mining stocks (especially larger companies with a proven track record) is a safer alternative to risky gold futures and physical bullion from a profit-perspective, some would obviously disagree.
Mining stocks are my favorite way to invest in precious metals. Of course, that doesn’t mean I don’t own any physical gold. Getting a little physical with gold investments is OK if it’s done in moderation. Physical gold and silver coins are a great “worst-case scenario” investment, and can provide the more cautious investor with some peace of mind.
But in the end, investing in metals through mining stocks is my preferred gold investment because it pays dividends, allows one to invest in long-term growth, allows for value investing, and doesn’t decrease one’s ability to profit.
Questions for the readers:
- Do you think precious metals are going to go up or down?
- What would bring you to decide that now is a good time to invest in metals?
- What, in your opinion, is the difference between investing and speculating?
Shaun Connell is a full-time personal finance blogger and student living in rural Arkansas. He runs several blogs on investing and finance, including a daily blog on gold, and a weekly blog on wealth management. Shaun firmly believes in dividend investing, debt-free living, and long-term financial planning.