Gold Mining Shares vs Physical Gold Bullion – Which to Buy in 2023?

Here’s quite a specific question from a reader looking at gold mining shares vs physical gold bullion.

“I’m interested to know if owning gold and silver mining shares or owning actual gold and silver products makes any difference if your goal is wealth creation? In the short term and in the long term which would be more valuable?”

Estimated reading time: 10 minutes

We have commented on this topic previously in general terms. But not on this specific question. See: Paper Gold vs Physical Gold – What Should You Buy?

We’ve also compared gold to shares or stocks in general: Dow Gold Ratio: How Does Gold Compare to Shares For the Past 100 Years?

Before we delve into this question, let’s first look at the pros and cons of gold and silver mining shares versus physical gold and silver bullion.

Firstly, What are Gold Shares or Gold Stocks?

Gold shares or gold stocks are shares in the ownership of a gold mining or gold exploration company. You own a portion of the companies assets and liabilities. You may receive a dividend each year. The price of gold stocks and shares will be impacted by the spot price of gold. But the gold stock prices will also fluctuate due to many other business factors and according to market conditions.

Disadvantages of Gold Mining Stocks Compared to Gold Bullion

You are investing in a business as opposed to owning financial insurance. Thereby associated risks include:

• Management risk – who runs the company will have a large bearing on its profitability.
• Geo-political risk – who is in government may impact the company. Gold mines have a history of being nationalised in some countries.
• Lack of cashflow risk – Non producers are even more risky and speculative. Because they have no cash flow and trade instead based upon the level of gold reserves they have discovered.
• Risk of dilution of ownership via issuing more shares – this is a common way a company can raise more capital for expansion or exploration. But it does mean you end up owning less of the business.
• Further counterparty risk – Most shares are owned via a custodian so your ownership has another counterparty involved.

Advantages of Gold Mining Stocks Compared to Gold Bullion

• Fast to buy and sell – once you have a share trading account you can buy and sell gold and silver mining shares at the push of a button in mere minutes
• Low brokerage costs – various online stock brokers now offer very low commissions to buy and sell shares. Mining stocks are no different.
• Potential for very large upside – Choose the right company and regardless of what the gold price does you could make 100’s or 1000’s percent returns. (But on the flip side, choose the wrong company and even if the gold or silver price goes up, your share price could go down).

Wealth Protection Versus Wealth Creation

Our reader knows a thing or two. As she has phrased her question quite specifically with her goal being wealth creation. That is growing and increasing your wealth.

Whereas wealth protection is simply securing existing wealth. In this regard, physical gold bullion is the clear winner over mining shares.

The key advantage is that physical gold in your possession has no counterparty risk. That’s what makes physical gold (and silver) the only financial asset that qualifies as financial insurance. Unlike mining shares physical gold will not go to zero. While physical gold may vary in price from month to month and year to year, over the long term, gold has maintained its value incredibly well.

For more on the reasons to hold gold for financial insurance and the 5 benefits see: Why Gold Bullion is Your Financial Insurance

Wealth Creation – The Importance of Timing When Buying Gold Mining Shares

In comparing mining shares to physical bullion, the period we look at can make a big difference to their respective performance.

Long Term Comparison of Gold Bullion vs Gold Mining Shares

Looking back to the start of the current bull market in gold in 2000.

The HUI Gold BUGS Index (a Basket of Unhedged Gold Stocks) has gone from 37 to 267 – an increase of 7.22 times.

Whereas Gold itself went from $254 to $2007 – an increase of 7.90 times.

So you would have a little better off to simply hold gold bullion than gold shares since 2000.

However physical gold was also far less volatile than shares. Falling much less during the financial crisis (gold was just about the only asset to end 2008 higher than it started). Gold mining shares also fell much more in the correction from 2011 to 2015. Falling by over 80%, when gold itself fell around 45%.

Therefore by holding gold bullion since 2000, your “wealth” measured in US dollar terms has “risen” just under 8 times.

This comparison can also be made using the HUI to Gold Ratio chart.

This chart plots the price of the HUI index divided by the price of gold. Showing that apart from a few years leading up to 2004, the HUI Gold BUGS Index to Gold ratio has fallen since 2000. This is another way of showing that since the start of the current bull market, gold mining shares have not done any better than gold itself.

Short Term Comparison of Gold Bullion vs Gold Mining Shares

However on a shorter term basis gold and silver mining shares do offer the chance for wealth creation and building.

But timing is key. Casey Research highlights this very well:

A History of Gold Market Booms

“Below are the historical returns for gold producers during four separate cycles when gold boomed: 1979–1980, 1981–1983, mid-1990s, and 2001–2006.

These are not hypothetical returns. They are real.

First up, the king of all gold bull markets: 1979–1980…

Gold more than tripled during this period. But gold stocks more than quadrupled.

Returns of Producers from 1979 to 1980
Company	Price on 12/29/1978	Sept. 1980 Peak	Return
Campbell Lake Mines	$28.25	$94.75	235.4%
Dome Mines	$78.25	$154.00	96.8%
Hecla Mining	$5.12	$53.00	935.2%
Homestake Mining	$30.00	$107.50	258.3%
Newmont Mining	$21.50	$60.62	182.0%
Dickinson Mines	$6.88	$27.50	299.7%
Giant Yellowknife Mines	$11.13	$39.00	250.4%
AVERAGE		322.5%
Gold		214.0%

This wasn’t the only time gold stocks soared…

From 1981 to 1983, gold producers returned over 70% on average. And this happened in less than two years.

Companies like Agnico Eagle and Campbell Red Lake climbed over 120%. And Sigma shot up 73%.

These profits stemmed from a mere 10.8% rise in gold.

There was another boom in the 1990s. The average gold producer went up more than 200%…

Cambior rose 124%. Kinross Gold returned more than 190%. And Manhattan skyrocketed over 760%.

All while gold only rose 8%.

Then another big boom hit from 2001–2006. This one rivaled the boom of the early 1980s.

Gold returned 158%, while the average gold producer gained over 400%.
Newmont shot up 270%. Gold Fields soared over 500%. And Goldcorp returned over 800%.

As you can see, an increase in the price of gold (even a small one) can lead to huge returns.

Gold Stocks Move in Extreme Cycles

You can make a fortune in the gold market. But you must understand market cycles.

Gold stocks move in extreme boom and bust cycles, more so than most other markets. Contrast that with “noncyclical” businesses, like those that sell toothpaste or laundry detergent. Demand for these types of everyday items is steady whether we are in a bull or bear market.

Demand for natural resources like gold is highly cyclical. Just like with oil, investors pour money into gold miners during boom times.

A gold stock might soar 500% over a three- to five-year raging bull market. Then collapse 90% in six months in a nasty bear market.

…In the chart below, we charted the major cycles for gold stocks from 1975, when gold again became legal to own in the U.S., to the present. Eight distinct cycles played out during this time.”

Source.

So the above chart and numbers clearly show timing is key when it comes to investing in gold mining stocks. Silver miners can be even more volatile.

It’s also very important to have the knowledge to buy shares in the right companies.

Conclusion: Bullion versus Gold and Silver Miners

If you’re looking to simply buy and hold, then you should definitely go for the physical metal, not the miners. As in the long run gold has historically outperformed mining stocks or shares.

Investing or speculating in gold mining shares requires timing. It also requires knowledge in picking the best mining companies to invest in.

So if you’re serious about investing in gold mining shares or stocks, then we’d recommend you check out our favourite financial newsletter writer. We have been a subscriber of his for over 10 years. Learn more about him and the special deal he has offered our readers here.

He recently pointed out that the price to book value of many gold and silver mining companies was below one. This means their share price is below the value of their assets on their balance sheet. This occurred briefly in March 2020 at the Corona-panic lows. It was something he also noticed back in 2000 when he first bought many of these miners.

“There were many miners that were trading at or even below their book value. I was reminded of this when a sharp-eyed reader, RE, pointed out that SSRM last week at least twice was trading below price to book value. This is a great sign that lows are in. Many miners are trading at price to book values of 3 or under. And just as they are, and just as they were 20 years ago, it is hard to get anyone to buy them.

Some things never change!

Compare the price to book ratios of the most popular stocks to see how different things look between the expensive and the bargain stocks. Apple is at 57.5 times book value. For Tesla it is 27.7.”

Repeating what we said above, timing and knowledge is key when investing in mining shares. Right now we might have the timing right to invest in gold and silver mining shares. Check out our secret investment advisor for guidance on which shares to consider buying…

Buy Some Gold and Silver Bullion – and a Few Mining Shares Too

So if your aim is wealth creation, maybe buying some of each is the way to go.

Physical gold and silver bullion offer wealth protection. However they also offer some upside. With the chance for your purchasing power to also increase over the long term. Just as it has done since the year 2000.

Gold and silver mining stocks offer the chance for some very large gains. But the downside is there is also the chance for some very large losses if you get your timing or choice of company wrong. The numbers above show that you will need to sell in and out of gold mining shares in order to grow your wealth. Buy and hold won’t work.

So it may be wise to have mining shares as a much smaller percentage in your investment portfolio than physical gold and silver bullion.

Check out our range of physical gold and silver bullion products.

Editors Note: Originally published 7 February 2019. Last updated 18 April 2023 with latest charts and performance numbers for gold and gold miners.

Again, a reminder, if you’re serious about investing in gold mining shares or stocks, then we’d recommend you check out our favourite financial newsletter writer. We have been a subscriber of his for over 11 years. Learn more about him and the special deal he has offered our readers here.