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Gold at record highs! Are ASX gold miners or ETFs a better bet?

Old fashioned scales weighing two gold bars in front of dark background, gold share price, newcrest mining share price
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The gold price has been a quiet achiever over the year so far. While most investors’ attention has been focused on the recovery of the S&P/ASX 200  (INDEXASX: XJO) since the market bottom on 23 March, the gold price has also been climbing. At March’s low, the yellow metal was priced around US$1,478 an ounce. Today, that same ounce will set you back US$1,778 (which is more than a 20% bump). Just 2 days ago, gold hit $1,787 an ounce — it’s the highest price since 2011’s all-time high of $1,917.90.

Why has the gold price been climbing?

Gold is usually viewed as a ‘safe haven’ asset due to its physicality, scarcity, and former role as a monetary base. The coronavirus pandemic has created an almost perfect environment for gold to flourish in this role in recent months. Further, investors worry about the consequences of central banks using ‘quantitative easing’ (QE) to assist their economies through the crisis. QE is viewed by many people as ‘money printing’. This is leading to fears of an inflationary investing environment in the coming years. Last month, I wrote about how the ultra-rich are hoarding gold for this very reason.

How can you invest in gold?

There are 3 conventional ways of investing in gold:

  1. Buying physical gold bullion
  2. Invest in a gold miner
  3. Buy gold through an exchange-traded fund (ETF).

Buying physical bullion can be unattractive to investors due to storage and transportation costs, so we’ll leave this out of the discussion.

That leaves ETFs or ASX gold miners for your perusal.

Advantages of gold ETFs

A gold ETF is an easy way to invest in gold because the fund manager buys and stores the gold on investors’ behalf, usually in a bank vault or other secure location. An ASX example is the ETFs Metal Securities Australia Ltd (ASX: GOLD).

Gold ETFs are an easy choice, as they will usually mirror the returns you will see in the gold price. This will, of course, be adjusted for currency fluctuations. But there are a couple of drawbacks. Gold (as an unproductive asset) gives off no yield, so you can’t generate cash flow unless you sell your units. Also, the gold still has to be stored and guarded, which means you will pay a fee to the ETF for the privilege.

Advantages of ASX gold miners

A gold miner is another popular way of gaining exposure to gold. As a gold miner is a company, you, as a shareholder, indirectly ‘own’ any gold the company mines. And as a company is (hopefully) profitable, you can also receive a yield on your investment through dividend payments. As an example, Newcrest Mining Limited (ASX: NCM) is the largest ASX gold miner and currently offers a trailing dividend yield of 1%.

But the good news for a gold miner is that it can deliver returns that exceed the gold price movements. If a company’s cost to mine an ounce of gold is US$1,000, and gold is selling for $1,500 an ounce, the company makes a profit of $500 per ounce. But if gold prices rise to US$2,000 an ounce, your investment just doubled its profitability, even though gold ‘only’ rose 33%.

Of course, this works in reverse too. Meaning that a gold miner is effectively a ‘leveraged bet’ on gold prices. There are also other concerns to worry about with a miner including how well the company is run and the debt it employs.

Foolish takeaway

A gold miner can be a lucrative way to gain exposure to gold. But it’s also riskier than just owning physical bullion or investing in an ETF. As such, if exposure to gold is important to your investing philosophy, I think most retail investors are best served by an ETF.

Where to invest $1,000 right now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

*Returns as of June 30th

Motley Fool contributor Sebastian Bowen owns shares of Newcrest Mining Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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