Gold or gold mines?

Gold mining is seen by many investors as a kind of leverage on investing in physical gold, because the profit margin of a gold mine increases or decreases more than proportionally with a change in the gold price. Is the Gold price, then the value of gold mining shares usually rises much faster. Even when prices fall, we see that the mines often fall faster than the underlying value of the gold.

Anyone who has followed the price development of gold mines in recent years will immediately see that this is a very risky investment. The price movements are so large that it is not wise to invest in gold mining stocks with borrowed money for the long term.

The following chart shows what return you would get if you went long or short on the market with a leverage of three. NYSE Arca Gold Miners Index, a basket of almost fifty different gold mines around the world. If you had gone long on this index two years ago with a leverage of three times, you would have lost almost 60% of your money by now. 

If you shorted gold mines with the same leverage two years ago, 96% of your investment would have evaporated! Investing without leverage turned out to be the most sensible option, because then you would have achieved a return of more than 19% over the past two years.

Investing in gold mines? Be careful with leverage! (Graph via Twitter)

Gold vs Gold Mines

Are you hesitating between Buy gold Or invest in gold mines? Then it is important to first determine what the purpose of the investment is. Are you worried about the value of the money or the stability of the financial system? An investment in physical gold is preferable, because the precious metal has no counterparty risk. You will also always be able to access these assets, even in a crisis situation where the banks remain closed and you can only withdraw money from your bank account to a limited extent.

If you mainly want to get a return and you are willing to take more risk, then an investment in gold mines can be interesting. When the price of gold rises, the value of the mines usually rises faster. However, it is advisable to be careful with leverage, as you run a much higher risk of losing your investment.

Disclaimer: The above article is not professional investment advice, nor is it an invitation to start investing. Investing involves costs and risks. Past performance is no guarantee of future results.