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8 big benefits of investing in gold stocks

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Investing in gold stocks offers big benefits and could be a wise move for certain types of investors. Getty Images

When it comes to investing, portfolio diversification is crucial for reducing risk and maximizing returns. While traditional investments like stocks and bonds are staples in many portfolios, considering alternative assets, like gold, can provide valuable benefits — including the ability to diversify your portfolio and mitigate against the risk of losses caused by other assets.

Interest in gold investing has skyrocketed in recent years, due in large part to how gold is considered a safe-haven asset, which can make it a useful tool in uncertain economic environments, like the one we're currently experiencing. In fact, the uptick in demand for gold caused the price of gold to hit a new record high this week, climbing above $2,260 for the first time. So, it's a great time to consider investing in this precious metal.

But you don't have to buy physical gold bars or coins to do that. There are numerous options for investing in gold, including options like gold individual retirement accounts (IRAs), gold exchange-traded funds (ETFs) and gold stocks. Investing in gold stocks in particular can offer its own set of unique benefits. Below, we'll detail what you should know.

Compare some of your top gold investing options online today.

8 big benefits of investing in gold stocks

If you're weighing your gold asset options, here are eight significant benefits of buying gold stocks to consider as part of that process:

Hedge against inflation and economic uncertainty

Gold acts as a hedge against inflation and economic turmoil, which can make it a smart investment for many people. That's because, as currencies lose value over time, whether it's due to high inflation or other types of economic issues, gold has historically maintained its purchasing power. 

And, while physical gold is what investors typically use to hedge against these types of uncertainties, gold stocks can come in handy, too. That's because gold stocks provide a leveraged play and can outperform compared to physical gold when gold prices rise.

Learn more about how gold investing could benefit your portfolio here.

Portfolio diversification 

Gold has a low correlation with other assets like traditional stocks and bonds, which can be useful in terms of portfolio diversification. By including gold stocks in your portfolio, you can potentially reduce overall risk and volatility, as gold tends to perform differently than traditional assets. In turn, adding gold stocks to your portfolio may help offset losses from other types of investments during periods of market turmoil. 

Potential for capital appreciation

Gold stocks offer the potential for substantial capital gains. As gold prices rise, the profits of mining companies can increase exponentially, leading to greater stock appreciation versus the gold price change.

Easier to liquidate than physical gold

While physical gold bullion provides direct price exposure to gold, it can be difficult and costly to liquidate and transport that type of asset. But gold stocks are much more liquid, allowing easier entry and exit from positions when necessary.

Potential to leverage production volume 

Owning physical gold provides exposure to just the commodity price. However, gold mining stocks allow investors to benefit from gold mining companies increasing production over time by developing new mines and expanding existing operations. As miners ramp up output, their revenues and potential profits grow, providing leverage beyond just the gold price itself. And that, in turn, can be beneficial for investors.

Dividend income potential

Some established, profitable gold miners pay dividends. That offers investors a stream of income in addition to capital gains potential, which can be an advantage over physical gold.

Optionality on future gold discoveries

A key benefit of gold stocks is the upside optionality that stems from potential major discoveries. Significant new gold deposit findings can send gold stock shares surging higher as that expected future production gets priced into the stock. In turn, this optionality provides an upside beyond just tracking gold prices.

No storage or custodian fees

A key advantage of investing in gold stocks over physical bullion is avoiding costly storage and custodian fees associated with holding gold. The cost of storage, insurance and custodian fees can add up quickly if you're holding physical gold, but when you own gold stock, the mining companies bear these costs, allowing you to gain gold exposure more efficiently.

The bottom line

It's important to note that investing in gold stocks, like any investment, carries risks. Gold mining companies are subject to operational risks, regulatory changes and fluctuations in the price of gold. And, individual gold stocks can be volatile, so investors should carefully research and diversify their holdings within the gold mining sector.

Despite these risks, investing in gold stocks can offer valuable benefits if you're seeking portfolio diversification, a hedge against inflation and potential for capital appreciation. And, by taking the time to understand the dynamics of the gold market and the factors that drive gold mining companies' performance, you can make informed decisions and potentially enhance your overall investment strategy.

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