Should you buy gold or gold miners?

With the price of gold up more than 25% year-to-date, should you buy gold or gold miners?

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Gold has been all the rage in 2016. Amid rising inflation and growing global economic uncertainty, the price of the precious metal has risen over 25% since the start of the year. This rally would suggest that gold’s multi-year bear market has finally come to an end, and according to many analysts, the price of gold has yet to peak.

Why invest in gold?

As a safe haven asset, gold is negatively correlated to price movements in the stock markets. This means investing in gold can help you diversify your investment portfolio so that you’re better protected when there’s a market crash. There’s a lot of uncertainty around, and gold can be a useful way to preserve capital during periods of market volatility.

What’s more, as with most commodities, gold is a good hedge against inflation. In the UK this has so far only ticked up slightly in July, but as inflation expectations have surged since the country voted to leave the EU, many analysts expect inflation to have a lot further to climb in the coming year.

Physical gold vs gold mining stocks

There are many ways in which investors can get exposure to gold prices. Buying physical gold bullion coins and bars is the most direct method of investing in gold, but it can be very expensive for small investors. Instead, investors should consider buying physical gold funds and gold mining stocks, which are already popular with retail investors.

Physical gold ETFs, like ETFS Physical Gold (LSE: PHGP), offer investors a cheap way to track gold prices. These ETFs are useful for investors looking for a safe haven in times of economic uncertainty, especially in the short term. And since price fluctuations for gold are generally less volatile than stocks, owning physical gold is usually lower risk than investing in gold miners.

Investing in gold mining companies is generally considered to be a leveraged play on gold prices. That’s because, small changes in the gold price can have a huge impact on the profits of gold miners. 

Also when it comes to gold miners, you’ll find that not all stocks are created equal. The differences in valuations, reserves and production costs are hugely significant in determining the intrinsic value of each miner, and you’ll have to keep an eye on all of these factors to help you pick the right stock.

Randgold Resources (LSE: RRS) is one of the priciest miners, with a forward P/E of 34. But given that it has the best track record for project delivery and increasing production volumes, it’s probably the safest and most reliable pick too.

Smaller rivals such as Centamin (LSE: CEY) and Hochschild Mining (LSE: HOC) may be more risky, but they could offer investors potentially greater returns because they appear to be doing more to ramp up production and cut costs. Recently, Hochschild has been doing particularly well, with the company reporting a major exploration discovery and a big surge in gold and silver output for the first half of 2016.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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