A 'Cheap' Way To Buy Gold?

| About: SPDR Gold (GLD)
This article is now exclusive for PRO subscribers.

I've written probably a dozen articles here about why I love gold, and am even looking forward to a major correction so I can acquire more ounces for myself.

But still, this doesn't mean I'm a blind gold investor. That's a horrible approach to pretty much anything. Only recently, I wrote about the worst gold-investing advice I've ever read, and it was from a reputable source. I've also written about why most gold forecasts fail, because too many people -- bears and bulls -- put faith in what is essentially voodoo science mixed with numerology.

Just recently, someone commented that he had his clients replace bonds with gold mining stocks. That's just a bad deal. There's a place for both in a well-balanced portfolio.

Are Gold Stocks a "Cheap" Way to "Buy Gold?"

In this article, we're going to review a common argument that I've seen everywhere, including this website, about gold stocks like Newmont Mining (NEM), Randgold Resources (GOLD), Barrick Gold (ABX), Gold Fields (GFI), Goldcorp (GG), Yamana (AUY), and others, encouraging people to see them as a better investment than the ETF GLD or just plain physical gold.

A lot of this, I'm sure, works for silver stock investors and holders of SLV.

The argument is this: "Gold stocks are a way to buy 'cheap' gold."

Unfortunately, this is probably the most common myth. It might end up being true, but just because gold stocks aren't keeping up with gold doesn't necessarily mean anything about them now being cheap -- it might mean they just weren't as good of an investment during the same time frame.

Why Gold Stocks Haven't Kept Up With Gold

Gold mining stocks carry new risks that gold just doesn't have. And the profits are getting harder and harder to realize. This will just get progressively worse as we move into the future. Every year gold prices stay relatively flat or go up moderately is another year it's difficult to produce gold.

Unlike copper or some other commodity, this won't have the same short-term impact to gold prices -- it could take years before miners keep up with gold demand. This is because gold is quasi-commodity, quasi-money in how it behaves in the market -- but mostly money.

It gets worse. Gold mining stocks, unlike gold, aren't responding to just what people think gold will be worth in a few months or weeks or a year -- it's got long-tem fundamentals built in. And that means that a massive gold correction in 5 or so years should be factored in, as well as the possibility of a major bear market.

How to Invest in Gold

If the goal is to acquire cheap gold, and you're going to make a big bet on the assumption that gold has way more to climb, then just buy physical gold or GLD.

It's less risky, and if there's a bull market, you should make a great deal of money. There's also less correlation with the stock market itself.

If you've done your own analysis and think some gold stocks are good, like this case for Canadian stocks, then there's obviously a place in one's portfolio -- but it'll never replace the need for real, physical metals. It should be treated as a different animal.

To see more reasons the two aren't the same, check out Gold Mining Stocks Vs. Physical Gold Bullion.

If you want cheap gold because you think it's going to grow over time, then just buy gold now. Gold stocks are a different animal and shouldn't be seen as a cheap alternative.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I own physical gold and silver and will be buying more regularly.