Gold or gold stocks?

What is the best investment? Gold, silver or gold mining stocks?

It’s a good question, and an important one.

I recommend you own some gold and silver. Gold and silver are real cash. Owning some real cash in a recession is a good idea. It gives you an emergency fund to use in case you lose your job, and it protects you against inflation.

However, as an investment, it’s a more complicated discussion.

Gold and silver serve as real cash in an investment portfolio, too. When the value of stocks, bonds, and real estate drop in real terms, your cash will enable you to buy those other investments at much lower prices.

However, gold and silver aren’t going to make you rich. They are going to protect the purchasing power of your savings from inflation.

Gold stocks are more risky than physical gold and silver. An investment in gold mining or royalty stocks gives you a leveraged exposure to the precious metals market. Let’s discuss the differences between investing in gold and gold stocks.

1. Risk. Gold stocks are riskier than physical gold. Physical gold may be volatile, but it will never be worthless. That’s the reason it’s a real safe haven. As Warren Buffett says “The investor should not fear investment volatility. He or she should fear the permanent loss of capital.” While gold will never be worthless, the shares of a gold mining company could become worthless if that business goes bankrupt.

2. Leverage. With the added risk of gold stocks, there is added reward, too. If the price of gold goes up 50%, the price of some mining stocks may go up 100% or 200%. The reason is because they are selling gold products. If they are able to sell something for much higher prices than the costs of production, profitability will rise a lot, and with it the value of the business.

3. Taxes. If you invest in a non-qualified account, you’ll pay taxes on the dividends and capital gains of your investments. If you buy and sell gold stocks, you’ll probably pay 15% in taxes on the dividends and capital gains (I say probably because I don’t know your tax situation). However, if you buy and sell gold or silver, you may pay 28% on long term capital gains. While gold is a safer investment than gold stocks, your gains will be taxed at a much higher rate (28%) than gold stocks (15%).

4. Costs. If you buy physical gold and silver, you may have to pay storage fees. However, the smallest safety deposit box at a bank can hold hundreds of thousands of dollars worth of gold coins. These boxes can cost as little as $50 per year. In addition for veteran military, Chase Bank offers safety deposit boxes for free if you have a bank account with them.

Understanding the differences between gold and gold stocks is important. We’ll cover it in more detail during our next webinar.

Have a great week, and I’ll talk to you again soon.

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