Physical Precious Metals Vs Mining Stocks: Which Is A Better Investment?

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Over the years, investments have grown as new markets and trends emerge. Recently, there’s been an increase in real estate stocks, cryptocurrencies, and company shares, opening up a comprehensive portfolio for more people to invest in. However, some of the significant forms of investment remain to be precious metals and mining stocks.  This can be attributed to the history of precious metals holding value and being used as currency, before introduction of standard currencies. 

Additionally, precious metals have been seen as an excellent way to hold wealth due to their immunity against inflation and loss of value, of which standard currencies face. While investing in precious metals and mining stocks may seem similar as all of them have fundamentals in natural gems, they’re different. 

Investing in precious metals involves having ownership in physical pieces because it’s considered a commodity. In addition, owners who don’t store the metals can have certificates that indicates ownership. A good example is a silver certificate where a silver owner is entitled to a stated amount of silver, usually stored by a holding company. 

In contrast, investing in the stock exchange means you don’t own a physical form of any commodity. Instead, you own shares or equities in a company. In the case of investing in stock mining, you’ll own a certain percentage in a firm that mines precious metals and other minerals. As a result of similarity in the case of precious metals, there’s been a debate on what’s more profitable between the two investment forms. 

This article will cover each of these forms, including advantages and disadvantages, to help you in determining what suits you best.

Investing In Precious Metals

As stated, investing in precious metals is having possession of the physical state of these metals or owning a legal tender that indicates possession. The most common precious metals invested in include gold, silver, platinum, and palladium. Gold is the most invested in metal because of its durability and resistance to corrosion, and less industrial usage, which helps preserve the value. 

If you want to invest in precious metals, here are some of the common ways to do it:


  • Bullions, Bars, and Coins


One of the primary ways of investing in precious metals is buying them in their physical form. After being mined, the precious metals undergo processing, then minted into coins or bars. Good examples are silver coins and gold bars. The owners can then keep the metals until a hike in price when they can consider selling. 


  • Certificates 


If you don’t want to hold your precious metal in its physical form, you can buy them from a holding firm; then, you’ll be given a certificate that indicates you’re a legal owner. For example, for silver owners and collectors, the silver certificate is used to indicate ownership of the stated amount of silver. 


  • Futures And Options


Investors who want to trade in real-time can invest in options to predict the prices of precious metals, make bets, and win profits. However, this is a risky method as there are chances of making losses, too. 


  • Exchange-Traded Fund (ETF)


Another way to invest in precious metals is investing in ETFs. These exchange programs allow you to purchase these metals without acquiring them in physical form. However, when you’re paid from these funds, you still won’t get the physical form of these precious metals. Instead, you’ll be paid in the currency you invested in. 

Advantages Of Investing In Precious Metal

After looking at the different methods by which you can invest in precious metals, the next step is explaining why metals have become an essential commodity for investors in a very long time. Here are some of the advantages of investing in precious metals:


  • Hedge Against Inflation 


When standard currencies lose value in cases of inflation, precious metals such as gold are always known to help protect holders against inflation. This is because these metals don’t lose value and if in the rare case where the value drops, they quickly find a way back. When compared with a currency such as a dollar, the purchasing power of precious metals has consistently increased. Contrarily, that of the dollar has decreased. 


  • Instant Liquidity 


Liquidity means the ability to convert an asset to currencies easily. Compared to other investments such as real estate, precious metals offer instant liquidity because of the demand. So, while you may struggle to find a buyer for other assets, that won’t be the case with precious metals.


  • Diversification 


It’s always advisable to maintain a healthy portfolio when investing. This means you should diversify your portfolio to cover different forms of investment. One of the best ways to diversify your portfolio is by investing in precious metals. They hardly lose value and can protect your investment in times of economic recession. 


  • Scarcity And High Demand


The supply of precious metals has significantly dropped as it’s now more costly and difficult to mine. However, the demand has increased, especially for cases of gold usage in jewelry. As a result of a continuous low supply and high demand, the prices will always go up. Therefore, if you choose to invest in precious metals now, you’re likely to profit much going into the future. 

Disadvantages Of Investing In Precious Metals 

Even though physical precious metals have several advantages, some downsides come with them. Here are some cons facing precious metals investment of which investors should be keen about:


  • High Cost 


Generally, precious metals are costly to purchase, and even though there are smaller units, it’s still relatively expensive to acquire them. Additionally, you’ll incur extra expenses such as insurance, transport cost, and storage. When you sum up all these costs, you’ll end up paying more money than the actual price of that unit of precious metal. 


  • Susceptible To Theft 


There have been many record cases of precious metals theft in jewelry stores, houses, and other places. This happens due to the high demand for the metals and the value they hold. Therefore, thieves know they can fetch a good amount of money if they get hold of the gems.

As a result, even though you may make a good investment in precious metals, you may end up losing it all to theft if you don’t find a secure way to store them. 


  • No Interests 


When you buy precious metals, and you store them, there’ll be no interest being earned. While the value may increase and you’ll get a higher amount if you decide to sell, that’s just it. A good investment should earn you interests or at least some monthly returns, like in the case of real estate. 


  • High Taxes


Holding precious metals in their physical form could mean you’re subjected to high capital gain taxes of over 20% by the time you sell. This capital gain tax will significantly eat into your investment returns, which isn’t something any investor would love. 

Investing In Mining Stocks 

Unlike in precious metals, investing in mining stocks is buying equities in a mining firm. Different mining firms have invested many resources in finding mineable minerals such as precious metals, oil, and gas. There are two significant categories of mining stocks from which you can invest in: 


  • Majors


In major, mining companies are well-established companies that have been in business for a long time. These companies are well-capitalized and have operations in different places globally. They also have a stable reserve that can easily stand firm against difficult mining periods, and therefore, it’s a safe haven for investors. 

However, the safety that majors offer means less risk, and therefore investors have a steady but low return in their investment. The profits and costs are usually computed per ton of the mineral being mined. 


  • Juniors 


In contrast to the major, juniors are always new entrants or small companies whose leading venture lies in the hope of finding minerals and utilizing them. It’s more of a speculative form of investment as investors pump their money in, hoping to make huge returns in the end. 

Junior companies have three plausible outcomes; failure, long-lasting success and getting absorbed by a major. If they find substantial mineral deposits, then they make huge profits for investors. However, due to the depreciation of mineral reserves in the ground, it’s highly unlikely that the juniors will make huge profits. Often, there’s always a failure, and investors lose their money. 

Before investing in juniors, it’s therefore essential to understand the risks that come with it. Of course, the returns are so huge, but so is the risk. 

Advantages Of Investing In Mining Stocks

For investors who opt for mining stocks instead of physical precious metals, here are some of the benefits they may enjoy:


  • Different Risk Level


When you’re investing in mining stocks, you have the option of investing in either juniors or majors. Each of these companies has a different risk level, with juniors having a high risk and a potential of high returns. On the other hand, those who want low risk and a steady flow of returns can opt to invest in majors. 

Each of these categories suits individual investors as some are risk-averse and others risk-tolerant. As such, they aren’t pegged to a specific mode of investing. 


  • Easy To Understand And Invest In


Mining companies have an easy-to-understand structure through which investors can follow and make investments. Moreover, operations of mining and ways of investing follow a general process. Especially for the major companies, it’s therefore easy to invest. 

In addition, when you buy shares in a mining company, the hassle of having to mine or look for minerals is shouldered by the company and not you. 


  • Growth Potential 


While it may be hard to get significant shares in an already established company, it’s possible to start in a junior company with the potential to grow. The shares in the company could be trading at low prices, and hence, purchasing them means a higher value if the company grows.


  • Liquidity 


Every day, company shares are usually traded between buyers and sellers. This means stocks have high liquidity if you want to convert to cash. So, if you’re at a point where you want to sell your mining stocks, you can easily find a buyer without much struggle

Risks Of Investing In Mining Stocks 

Mining stocks have several disadvantages, too, which may significantly affect investors’ returns. Before pumping your money into such investments, here are some of the risks to understand: 


  • Geological Risks


Companies that invest in mining always set up their equipment in different countries. Each of these countries has different regulations such as taxes and, sometimes, power changes in the government structures. As a result of this, operations can be disturbed in a particular company, affecting the investment. 


  • Risks Of Failure


For investors going for juniors, they risk losing part or whole of their investment if they fail to find any mineable mineral. Even for those in majors, the depreciation of minerals reserves could have devastating effects if they can’t find more deposits to support their operations. 


  • Price Fluctuations 


Price fluctuations in a particular mineral could be harmful to the portfolio of any investor. Even though majors always anticipate price drops and shield themselves using their reserves, a prolonged price fall could eat into their finances and affect their ability to stabilize. 

Juniors are more affected by price fluctuations as they don’t have enough reserves to continue operations until the price stabilizes. This could force them to sell at a low price, which could cause significant losses to investors. 


Each of these investment types has both merits and demerits. So, when choosing to work with any of them, you must do your research well. What do you want? What profits do you want to make? Or what are the regulations on the type of investment you’ve chosen? 

As seen, having physical precious metals could mean being more hedged against inflation and economic recession but still vulnerable to high capital gain taxes and theft. On the other hand, mining stocks may give you a very high return in investment if the venture becomes successful, but again, you risk the loss of investment if it turns otherwise. Therefore, be keen on what you want, do your research well, then choose what you’re more comfortable with. 


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Jennifer Evans
President, @B2BNewsnetwork (launched Nov 2014). Content, community and analytics obsessed. Inventor @squeezecmm. Past chair, @itac_online @whiteribbon