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Investment in gold bullion and gold coins trumps investment in gold mines

January 23, 2013305 view(s)

Last year, gold investors typically dedicated their resources into one of four categories: gold bullion, gold coins, gold mining stocks or new funds which only invest directly in the precious metal itself. But which one has provided the greatest return and security?

A recent story from USA Today explored the relationship between investors who buy physical gold directly as bullion or coins and those who invest in stocks or funds.

At one time, gold mining stocks were considered to be the safest investment, especially in a market where the price of gold was climbing year over year. That’s because, in the past, when the price of gold rose, the companies that mined it saw their profits multiply. Their mining costs remained fixed, but profits on each ounce would grow dramatically.

“Let's say you owned a mine that could produce gold for $1,100 an ounce,” money columnist and reporter John Waggoner wrote in USA Today. “When gold is $1,200, you make $100 an ounce in profits… [But then] gold jumps from $1,200 to $1,500, an increase of $300, or 25 percent. For the gold miner, however, profits have jumped from $100 to $300, a 200 percent gain.”

But in 2012, gold mining stocks typically lost money and proved to be the worst investment choice for gold investors. Gold bullion in 2012 closed at $1,675.80 up from $1,531 at the start of the year, almost a 7 percent gain. But the average gold-mining fund dropped 6.6 percent.

"The public is much more leery of stocks than they are of gold, and the public sets the prices of stocks," Robert Cohen, manager of the Dynamic Gold and Precious Metals fund, told Waggoner.

"In a market where there's a perception of large financial problems, people get nervous about stocks," said Cohen.

The business of mining gold has gotten much trickier in recent years as well, in part due to the rising price of gold bullion itself, which has grown each year since 2000.

Costs are going up for gold-mining companies, said Cohen. And many countries where gold miners operate are now increasing their demands for a cut of the profits.

New mines are even more troublesome. Environmental expenses for new mines are huge.

"Ore grades are down, discoveries are down, environments are more hostile and infrastructure is less available,” summarized Cohen.

Recognizing the increasing risks for the development of new gold mines, lenders are charging mining companies more to borrow the money needed to develop them.

Funds that invest directly in gold have performed better. Rather than investing in gold’s procurement, they invest directly in the precious metal itself. However, investors don’t own the gold, and they don’t hold the gold. They simply own paper that says they own a piece of the fund itself.

Investors who are seeking a safe haven for their money that delivers a strong performance, turn to gold bullion or gold coins. These investors can take possession of their precious metal directly, or keep it stored in sophisticated vaults or other facilities. In both cases, ownership clearly belongs to the buyer.

Many savvy investors preferred to focus their investment on rare gold coins, which prove valuable on two fronts. Not only are they worth the spot price of the gold they contain, but they also hold a separate and often higher value as a rare government-issued coin.

Weighing the value of stocks and funds versus bullion and coins, John Hathaway, a co-manager of Tocqueville Gold fund which invests directly in the precious metal said, "Most people are better off owning the metal.”

“When you own the metal, you don't have to worry about missed earnings or disappointing production results,” explained Hathaway. “You only have to worry about whether gold prices will go up or down.”

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