Is gold currently a better choice than gold mining stocks?

The price of gold will reflect a deterioration in economic and political uncertainty faster than the prices of gold mining companies, which is why the preference is for the precious metal rather than the stock. That's what ETF Securities analysts James Butterfill and Aneeka Gupta write in a new report titled 'Gold to outshine gold miners'.

Investors are currently experiencing heightened economic and political uncertainty due to the UK EU referendum, the Spanish and US elections, and slowing global economic growth. They prefer physical gold to gold-mining stocks as a safe haven.

Gold mining companies face risks such as labor disputes, power outages, political unrest, and adverse currency movements, which cannot be discounted. While gold mining companies have done well to reduce their debt, ETF Securities expects that the priority in cleaning up their balance sheets will come at the expense of future growth opportunities.

Gold mines have not only reduced debt, but also necessary investments

Gold or gold mining stocks?

Rising gold prices and falling AISC (All-In Sustaining Cost) have had the advantage of improving the profitability of gold mining companies. However, ETF Securities warns against overly optimistic about the gold mining sector. Many gold miners have cut back on investments in new projects, which will lower future profitability. From a valuation perspective, ETF Securities believes that gold mining companies are currently undervalued and sees no compelling reason to invest in them at this time.

Stronger profits in the first quarter of 2016 combined with a rising Gold price have helped improve sentiment towards gold mining companies and spurred the rally. For example, the price of gold rose by 19.3% this year, while the shares of gold mining companies have risen by an average of +81.6% since the beginning of this year.

Physical gold is a very different investment than the gold mining sector. Buying physical gold is a way to insure your assets against currency depreciation and financial disaster, while gold mines are a riskier investment. You buy shares of companies that have to deal with a lot of uncertainties and external factors. You take more risk with gold mining shares, with the chance of a much higher return.

Gold Mining Profit Margins vs Gold Price