Buying gold shares: how it works and your options

In uncertain times, wealthy investors look for stability, value-retaining assets, and protection against various risks. Gold often comes up as an interesting investment option, and you have a choice of several ways to buy gold. You can of course purchase physical gold, but gold shares are also an option you may have come across.

But what exactly are you buying? And does it actually give you the protection you're looking for?

In this article, we clearly explain what gold shares are, how gold mining shares work, what risks come with them, and how they differ from other ways of investing in gold.

What exactly are gold shares?

Gold shares refers to shares in companies active in:

• Gold mining
• Gold exploration (searching for new gold reserves)
• Gold production

So you're not investing in gold itself, but in a company that extracts gold from mines or manages its exploitation.

‍

Key difference: a share in a listed company that 'does something' with gold

‍

‍

Whereas the gold price is, in principle, only influenced by supply and demand, the price of a gold share is also influenced by, among other things:

• Business results
• Management decisions
• Political risks in mining countries
• Debt position
• Production costs

So you're exposed to many more (risk) factors than just the gold price.

How does investing in gold shares work?

Shares of listed companies that 'do something' with gold, such as gold mining shares, are traded on the stock exchange. Retail investors can only trade on the exchange via an affiliated intermediary, such as a broker or bank.

A broker is an intermediary where you open an account in order to trade on the exchange. You deposit money into the account, look up the relevant share, and can then place a buy order. Once the buy order is filled, the shares are added to your portfolio.

You then own a share, and therefore not physical gold. Selling your gold shares also generally takes place through this broker. You often pay a fee per transaction, both on buying and selling.

Why invest in gold mining shares?

The reason investors choose gold mining shares is often that they may rise more sharply than the gold price itself. That can indeed happen in practice, but it can also be the case that they fall more sharply than the gold price itself.

When the gold price rises, miners can benefit from higher margins. Suppose:

• Production costs stay the same at €1,200 per ounce
• The gold price rises from €1,800 to €2,200

Profit per ounce almost doubles. That can cause the share price of a gold mining company to rise significantly.

But it also works the other way around. Where the gold price might fall by 'only' 20%, a mine's profit can fall by 50%. That's where the leverage effect lies. Mining is capital-intensive. Fixed costs for staff, energy, machinery, and transport simply continue. If the gold price (temporarily) falls below production costs, a loss can even occur.

The risks of gold shares

1. Business risk

A mine can flood, experience technical problems, face high energy costs, or labour disputes can arise. None of these things have anything to do with gold, but they do affect the value of your investment in a gold mining share.

2. Political risk

Many gold mines are located in Africa, South America, and Asia. Many of these regions are politically unstable, which can result in mines being forced to halt production, taxes being sharply increased, or exports being restricted.

All of these things can negatively affect the price of a gold mining share.

3. Expectation risk

Some miners are valued based on future discoveries that haven't yet been proven. If these fail to materialise, the share price can correct sharply.

Buying gold shares or investing in physical gold?

If you want to buy gold, there are therefore several ways to do so. Investing in gold shares is one of those ways, but investing in physical gold is also a popular choice.

Although both are related to the gold price, they differ fundamentally in structure, risk, and objective.

The overview below makes that difference clear.

‍