Getting Gold Exposure: Bullion vs. ETFs vs. Mining Stocks
How to Get Gold Exposure in Your Portfolio, Explained
A lot of talking heads say, “Buy gold!” but don’t really explain exactly how to buy gold or get exposure to the precious metal.
There are options when it comes to getting exposure to the precious metal, and each one has upsides and downsides worth being mindful of.
Whether you’re interested in holding physical gold in a safe storage space or simply want to add some gold exposure to your investment portfolio, this infographic shows you the differences between gold bullion, gold ETFs, and gold mining stocks.
What to Consider Before Investing in Gold
There are some key considerations to be aware of before you begin investing.
While below are some of the main factors to keep in mind as you pick a gold investment method, be sure to research each method and its properties thoroughly before investing.
Downside and Volatility Risk
The first consideration for any kind of investment should always be how much drawdown you’re willing to stomach before pulling your money out.
When the COVID-19 pandemic resulted in a price drop across the board for just about every kind of asset, the price of physical gold and gold-backed ETFs held up very differently compared to individual gold mining stocks and gold mining indices.
Case Study: Gold vs. Mining Stocks Drawdown and Returns
|Asset||Drawdown from March high to March low||Returns from March low to 2020 high|
|Spot gold and gold ETFs||-14.8%||42.9%|
|Barrick Gold Corporation||-42.1%||146.8%|
|Gold Miners ETF (GDX)||-46.0%||182.9%|
|Junior Gold Miners ETF (GDXJ)||-52.7%||237.9%|
While physical gold and bullion ETFs (which track gold’s price movements) tend to be more resilient during market downturns, they also offer less upside compared to gold mining stocks and indices during bull markets.
Junior miners or exploration companies offer the greatest volatility and potential upside, but carry the highest risk. When investing in any mining company, concrete results from their planning and drilling along with efficient execution in setting up projects and production will best determine the stock’s valuation.
Active vs. Passive Management
Some investors like to actively manage their investments while others prefer a more passive “set and forget” approach.
Each approach has its merits, however, gold ETFs and mining stocks are better suited for more active investors, while shipping and transport costs for physical gold can add up if buying and selling frequently.
Determine whether you’re going to be actively managing your gold exposure or if you’re going to be letting your investment sit for a while. This way you can determine the best method to reduce fees and commissions.
Three Types of Gold Exposure: Pros and Cons
Now, let’s dive into the three main types of gold exposure: gold bullion, gold ETFs, and gold mining stocks and ETFs.
1. Gold Bullion
If you’re looking to purchase physical gold in the form of bullion, there are a lot of considerations to keep in mind. These range from the various fees you’ll pay to where and how you’ll be storing and protecting your gold.
Many bullion dealers offer storage as a service, reducing shipping costs and the extra work of finding somewhere secure to keep your gold.
Fixed Position Sizes and Liquidity
When buying gold bullion it’s important to remember that you are buying coins, bars, or ingots of gold. This means that if you’re looking to sell off half of your gold position but only have a single 1oz gold coin, you won’t be able to!
Due to this, gold bullion might not be the best option for those interested in actively managing their exposure or for those with smaller amounts of capital.
Buying and Selling Commissions
Just about every gold dealer will charge commissions on any buying or selling, which are typically <1% of the value of the order with lower commissions for larger volumes. Some dealers include their commissions as a premium directly onto their prices.
Storing gold bullion with gold dealers or storage services will incur yearly storage costs that are typically a percentage of your holdings.
While some storage providers have low percentages, they will often have minimum monthly or yearly storage fees. For investors purchasing small amounts of gold it’s important to not let these fees eat up too much of your investment.
- Fees range from 0.12% to 1.5% annually, with some storage services providing fee discounts for larger volumes of gold
- While purchases of investment-grade bullion are tax-exempt, taxes are charged on storage fees.
Reputable gold storage services offer full insurance coverage on your bullion stored with them and will keep your gold physically separate from the company’s gold and off the company balance sheet. Some will even provide customers extra peace of mind with pictures of their bullion, typically for an additional cost.
Withdrawal Commissions and Shipping
If you’ve been storing your gold with a dealer but want it closer to home, you’ll have to pay withdrawal commissions along with shipping costs. Some dealers charge a flat rate per bullion or withdrawal, while others charge a percentage of your holdings.
If you’re having bullion sent to you without storing it at the dealer, you’ll just pay for shipping and insurance. These are typically flat fees along with a percentage of the dollar value of your order (ranging from 0.4% to 7.5% depending on the amount and types of bullion).
Before holding your gold privately it’s important to know:
- Privately held gold is sometimes not fully trusted when sold back to bullion markets, and can lose some of its value.
- Privately held gold is usually less physically safe compared to gold in a vault, and is almost always more expensive to insure.
2. Gold ETFs
Exchange-traded funds (ETFs) are a more approachable option to get exposure to gold for those with some experience purchasing shares using online brokers and exchanges.
Gold ETFs enable investors to have exposure to gold’s price while avoiding storage, shipping, and insurance fees. There are also fewer liquidity bottlenecks and tighter spreads with gold ETFs compared to gold bullion.
When buying gold ETFs it is important to remember that in most cases, you never actually own any physical gold. Even though these funds are backed by physical gold, you cannot redeem your shares in exchange for gold.
- Buying and Selling Commissions: When buying or selling shares of an ETF you’ll likely pay commissions. These commissions are decided by the brokerages and are typically below $10 per buy and sell order, with some brokerages offering commission-free trading to cut costs for active traders.
- Expense Ratios: Similar to storage fees on gold bullion kept in a vault, gold ETFs charge a yearly expense ratio to cover the costs of management and operations. Expense ratios are typically quite low, ranging from 0.17% to 0.75%, and are taken directly from your investment.
3. Gold Mining Stocks and ETFs
Gold mining stocks and mining ETFs are the most distant from physical gold, and offer exposure to the operating profits, losses, or even discoveries of mining or exploration companies.
Mining ETFs (like the GDX and GDXJ) are a basket of mining stocks for purchase as a single share, helping spread out the operational and concentration risk of investing in a single mining company. Mining ETFs are typically less volatile than individual mining stocks, but can still offer increased returns compared to gold bullion and gold ETFs.
Similar to gold ETFs, mining stocks and mining ETFs have:
- Buying and selling commissions decided by your online brokerage
- Annual expense ratios for mining ETFs
- Potential for dividends depending on the individual mining stock
If buying individual gold stocks, it is important to know that the prospects of any one company can differ incredibly. For this reason, it’s crucial to invest in quality companies, and to have an understanding at factors at play such as management competence, jurisdiction, or project quality and economics.
Find a Gold Investment Method that Works Best for You
Be aware that the methods discussed in this article aren’t the only ways to invest in gold.
If you’re willing to learn a bit more about contract structures and more complex fee structures, look into gold futures contracts. For those with some options understanding and experience, buying call options is another way to get gold exposure. Rare coins and jewelry are another investment method that also carries some artistic value.
Whatever you pick, make sure to thoroughly research your investment, its transaction and price mechanisms, and the commissions and fees you’ll be paying.
All of the investment methods discussed have differing tax implications depending on where you reside, which could influence your decision on how you invest in gold.
Visualized: Real Interest Rates by Country
Currently, over half of the major economies have negative real interest rates.
Visualized: Real Interest Rates of Major World Economies
Interest rates play a crucial role in the economy because they affect consumers, businesses, and investors alike.
They can have significant implications for people’s ability to access credit, manage debts, and buy more expensive goods such as cars and houses.
This graphic uses data from Infinity Asset Management to visualize the real interest rates (ex ante) of 40 major world economies, by subtracting projected inflation over the next 12 months from current nominal rates.
Nominal Interest Rates vs. Real Interest Rates
Nominal interest rates refer to the rate at which money can be borrowed or lent at face value, without considering any other factors like inflation.
Meanwhile, the real interest rate is the nominal interest rate after taking into account inflation, reflecting the true cost of borrowing or lending. Real interest rates can fluctuate over time and are influenced by various factors such as inflation, central bank policies, and economic growth. They can also influence economic growth by affecting investment and consumption decisions.
According to the International Monetary Fund (IMF), since the mid-1980s, real interest rates across several advanced economies have declined steadily.
As of March 2023, Brazil has the highest real interest rate among the 40 major economies shown in this dataset.
Below we look at Brazil’s situation, along with the data of the four other major economies with the highest real rates in the dataset:
|Nominal Interest Rate||Real Interest Rate|
In general, countries with high interest rates offer investors higher yields on their investments but also come with higher risks due to volatile economies and political instability.
Below are the five countries in the dataset with the lowest real rates:
|Nominal Interest Rate||Real Interest Rate|
|🇨🇿 Czech Republic||7.00%||-7.17%|
Hyperinflation, as seen in Argentina, can lead to anomalies in both real and nominal rates, causing problems for the country’s broader economy and financial system.
As you can see above, with a 78% nominal interest rate, Argentina’s real interest rates remain the lowest on the planet due to a staggering annual inflation rate of over 100%.
Interest Rate Outlook
Increasing inflation and tighter monetary policy have resulted in rapid increases in nominal interest rates recently in many countries.
However, IMF analysis suggests that recent increases could be temporary.
Central banks in advanced economies are likely to ease monetary policy and bring interest rates back to pre-pandemic levels when inflation is brought under control, according to the fund.
Visualizing the Assets and Liabilities of U.S. Banks
Banks play a crucial role in the U.S. economy, and understanding their balance sheets can offer insight into why they sometimes fail.
Understanding the Assets and Liabilities of U.S. Banks
The U.S. banking sector has more than 4,000 FDIC-insured banks that play a crucial role in the country’s economy by securely storing deposits and providing credit in the form of loans.
This infographic visualizes all of the deposits, loans, and other assets and liabilities that make up the collective balance sheet of U.S banks using data from the Federal Reserve.
With the spotlight on the banking sector after the collapses of Signature Bank, Silicon Valley Bank, and First Republic bank, understanding the assets and liabilities that make up banks’ balance sheets can give insight in how they operate and why they sometimes fail.
Assets: The Building Blocks of Banks’ Business
Assets are the foundation of a bank’s operations, serving as a base to provide loans and credit while also generating income.
A healthy asset portfolio with a mix of loans along with long-dated and short-dated securities is essential for a bank’s financial stability, especially since assets not marked to market may have a lower value than expected if liquidated early.
As of Q4 2022, U.S. banks generated an average interest income of 4.54% on all assets.
Loans and Leases
Loans and leases are the primary income-generating assets for banks, making up 53% of the assets held by U.S. banks.
- Real estate loans for residential and commercial properties (45% of all loans and leases)
- Commercial and industrial loans for business operations (23% of all loans and leases)
- Consumer loans for personal needs like credit cards and auto loans (15% of all loans and leases)
- Various other kinds of credit (17% of all loans and leases)
Securities make up the next largest portion of U.S. banks’ assets (23%) at $5.2 trillion. Banks primarily invest in Treasury and agency securities, which are debt instruments issued by the U.S. government and its agencies.
These securities can be categorized into three types:
- Held-to-maturity (HTM) securities, which are held until they mature and provide a stable income stream
- Available-for-sale (AFS) securities, which can be sold before maturity
- Trading securities, held for short-term trading to profit from price fluctuations
Along with Treasury and agency securities which make up the significant majority (80%) of U.S. banks’ securities, banks also invest in other securities which are non-government-issued debt instruments like corporate bonds, mortgage-backed securities, and asset-backed securities.
Cash assets are a small but essential part of U.S. banks’ balance sheets, making up $3.1 trillion or 13% of all assets. Having enough cash assets ensures adequate liquidity needed to meet short-term obligations and regulatory requirements.
Cash assets include physical currency held in bank vaults, pending collections, and cash balances in accounts with other banks.
Liabilities: Banks’ Financial Obligations
Liabilities represent the obligations banks must fulfill, including customer deposits and borrowings. Careful management of liabilities is essential to maintain liquidity, manage risk, and ensure a bank’s overall solvency.
Deposits make up the largest portion of banks’ liabilities as they represent the money that customers entrust to these institutions. It’s important to note that the FDIC insures deposit accounts up to $250,000 per depositor, per insured bank, for each type of account (like single accounts, joint accounts, and retirement accounts).
There are two primary types of deposits, large time deposits and other deposits. Large time deposits are defined by the FDIC as time deposits exceeding $100,000, while other deposits include checking accounts, savings accounts, and smaller time deposits.
U.S. banks had $17.18 trillion in overall deposits as of April 12th 2023, with other deposits accounting for 74% of the overall liabilities while large time deposits made up 9%.
After deposits, borrowings are the next largest liability on the balance sheet of U.S. banks, making up nearly 12% of all liabilities at $2.4 trillion.
These include short-term borrowings from other banks or financial institutions such as Federal Funds and repurchase agreements, along with long-term borrowings like subordinated debt which ranks below other loans and securities in the event of a default.
How Deposits, Rates, and Balance Sheets Affect Bank Failures
Just like any other business, banks have to balance their finances to remain solvent; however, successful banking also relies heavily on the trust of depositors.
While in other businesses an erosion of trust with customers might lead to breakdowns in future business deals and revenues, only in banking can a dissolution in customer trust swiftly turn into the immediate removal of deposits that backstop all revenue-generating opportunities.
Although recent bank collapses aren’t solely due to depositors withdrawing funds, bank runs have played a significant role. Most recently, in First Republic’s case, depositors pulled out more than $101 billion in Q1 of 2023, which would’ve been more than 50% of their total deposits, had some of America’s largest banks not injected $30 billion in deposits on March 16th.
It’s important to remember that the rapidly spreading fires of bank runs are initially sparked by poor asset management, which can sometimes be detected on banks’ balance sheets.
A combination of excessive investment in long-dated held-to-maturity securities, one of the fastest rate hiking cycles in recent history, and many depositors fearing for and moving their uninsured deposits of over $250,000 has resulted in the worst year ever for bank failures in terms of total assets.
Electrification2 years ago
Ranked: The Top 10 EV Battery Manufacturers
Real Assets2 years ago
Visualizing China’s Dominance in Rare Earth Metals
Real Assets2 years ago
The World’s Top 10 Gold Mining Companies
Electrification1 year ago
The Key Minerals in an EV Battery
Misc2 years ago
All the World’s Metals and Minerals in One Visualization
Misc2 years ago
All the Metals We Mined in One Visualization
Real Assets2 years ago
What is a Commodity Super Cycle?
Real Assets2 years ago
How the World’s Top Gold Mining Stocks Performed in 2020