Why physical gold is safer than gold stocks

In a world where inflation remains persistently high, geopolitical tensions are rising, and trust in the financial system is under pressure, more and more investors are seeking stable forms of wealth protection. Gold has played a central role in this for centuries. Anyone delving into gold as an investment soon faces a fundamental choice: do you invest in physical gold or in gold stocks?

Although both forms are linked to the gold price, they differ strongly in terms of risk, ownership, and reliability. In this knowledge article, we explain why physical gold is viewed by many investors as a safer form of gold investment than gold stocks.

What are Gold Stocks?

Gold stocks are shares of publicly traded companies active in the gold sector. These are not investments in gold itself, but in enterprises that mine, develop, or explore for gold. As an investor, you have indirect exposure to the gold price, combined with all the opportunities and risks associated with running a business.

In practice, this means that gold stocks function fundamentally differently from physical gold. Where physical gold is about ownership and store of value, gold stocks are primarily a financial investment with a higher risk profile.

Types of Gold Stocks

Within gold stocks, three categories can roughly be distinguished:

1. Gold mining companies

These are companies actively extracting gold from existing mines. Their revenues are directly linked to:

• the amount of gold mined
• the current gold price
• operational costs

Examples include large international mining corporations as well as smaller producers.

2. Exploration companies

Exploration companies search for new gold reserves but often do not produce gold yet. The value of these stocks depends heavily on:

• exploration results
• permits and licenses
• expectations regarding future gold production

This type of gold stock is particularly speculative and sensitive to market sentiment.

3. Royalty and streaming companies

These companies finance gold mines in exchange for a percentage of future production or revenue. They often have lower operational risks than mining companies but remain dependent on:

• contractual terms
• performance of the underlying mines

What determines the Value of Gold Stocks?

Unlike physical gold, the value of which is primarily determined by supply and demand, gold stocks are influenced by multiple layers of risk.

Important factors include:

• The Gold Price: A rising gold price can be positive for profitability.
• Operational Costs: Energy, wages, transport, and environmental costs have a major impact on margins.
• Debt and Financing: Many mining companies operate with significant debt.
• Management and Strategy: Errors in corporate management can weigh heavily on performance.
• Geopolitics and Regulation: Many gold mines are located in politically unstable regions.
• Currency Risk: Costs and revenues are often booked in different currencies.

As a result, gold stocks can fluctuate sharply, even in periods when the gold price itself remains relatively stable.

Gold Stocks are not real gold

A common misconception among novice investors is that gold stocks are "the same" as gold. This is not the case.

With gold stocks:

• you do not own physical gold
• you own a share in a company
• you face company, market, and counterparty risk

If a gold mine goes bankrupt, the value of the share drops or disappears, regardless of the gold price. With physical gold, this risk does not exist.

Buying physical gold is different than buying stocks from, for example, a goldmining company.

What is physical gold?

Physical gold is tangible precious metal that you actually own. This involves gold in the form of gold bars and gold bullion coins, produced by accredited refineries and mints. Unlike financial products, physical gold represents not a claim or contract, but a real asset with intrinsic value.

When you buy physical gold, you become the direct legal owner. The gold stands apart from banks, stock exchanges, and financial institutions and is not part of the regular financial system.

It is precisely this independence that forms the core of physical gold's appeal as an investment.

Physical gold as a store of value

Gold has been used as a store of value for thousands of years. Not because it yields interest or dividends, but because it has historically maintained its purchasing power relatively well.

In periods when paper money loses value due to inflation, debt, or monetary policy, gold often acts as an anchor of trust.

When buying gold, we distinguish between gold bars and gold coins.

Gold bars

Gold bars are rectangular blocks of gold with a fixed weight and high purity (usually 99.99%). They are produced by accredited refineries and are popular with investors who want to hold wealth efficiently at a relatively low premium over the gold price.

Characteristics of gold bars:

• focus on pure gold weight
• competitive price per gram
• suitable for larger investment amounts

Gold bullion coins

Gold coins are minted by official government mints and often carry historical or cultural significance alongside their gold value. Well-known examples are international bullion coins with high recognition and liquidity.

Characteristics of gold coins:

• wide international acceptance
• often smaller denominations
• suitable for staggered buying and selling

Direct ownership vs. financial property rights

One of the most underestimated yet crucial differences between physical gold and gold stocks is the type of ownership you hold as an investor. This difference largely determines the risk profile, the level of security, and the role of gold within your investment strategy.

What is meant by financial property rights?

When you invest in gold stocks, you do not own gold, but a financial property right. This means you are a shareholder of a company active in the gold sector. Your right is recorded in shares and contracts and exists exclusively within the financial system.

This entails several dependencies:

• you are dependent on the solvency of the company
• you are bound by stock exchange listings and trading hours
• you fall under national and international regulations
• you deal with intermediaries such as brokers and exchanges

Your property right is therefore indirect and functions only as long as the system continues to function as intended.

What does direct ownership mean with physical gold?

With physical gold, there is direct ownership. You own the gold itself, in tangible form. There is no contract, no promise, and no third party validating your possession.

The gold is legally yours and remains so, regardless of economic or financial circumstances.

Direct ownership concretely means:

• you have full control over the gold
• the asset stands apart from financial institutions
• there is no counterparty that can default
• your ownership exists even outside digital systems

This makes physical gold unique within an investment portfolio.

Ownership in crisis situations: theory vs. practice

In stable times, financial property rights often seem self-evident. It is only in crisis situations that the difference between direct and financial ownership becomes visible.

During financial stress, situations may arise such as:

• temporary stock exchange closures
• trading restrictions
• bankruptcies of financial institutions
• freezing of assets

In such scenarios, physical gold remains in existence as an asset, while financial claims may come under pressure.

Counterparty risk: a key reason why physical gold is safer

One of the main reasons why physical gold is seen by many investors as safer than gold stocks is the difference in counterparty risk.

This concept plays a central role in wealth protection but is often underestimated or insufficiently understood in practice.

What is counterparty risk?

Counterparty risk is the risk that a party you are financially dependent on cannot meet its obligations. This can be the result of:

• bankruptcy
• liquidity problems
• political or legal interventions
• system failure within the financial system

As soon as an investment depends on a third party, counterparty risk exists.

Counterparty risk with gold stocks

When you invest in gold stocks, you depend on multiple parties simultaneously. Your investment is not an independent asset, but a financial claim within a complex system.

Dependencies with gold stocks

With gold stocks, you deal with:

• the gold mining company itself
• the financial health of that company
• the stock exchange where the share is traded
• brokers and clearing institutions
• national and international regulations

If one link in this chain fails, the value or tradability of your investment can be severely affected.

Practical risks

Examples of situations where counterparty risk becomes visible:

• a gold mining company going bankrupt due to high debt
• nationalization of mines in politically unstable countries
• temporary or prolonged exchange closures
• trading restrictions during times of crisis

In all these cases, your investment in gold stocks can drop sharply in value, even if the gold price rises.

No counterparty risk with physical gold

Physical gold does not have this type of risk. You own the gold itself, without contract, promise, or dependency on third parties. The gold is your property and remains so under almost all circumstances.

What does this mean concretely?

With physical gold:

• there is no issuing institution
• there is no debtor who can default
• there is no bankruptcy risk of the asset itself
• there is no dependence on financial infrastructure

The gold retains its value as a precious metal, regardless of what happens to banks, companies, or markets.

Gold bars are a better way to protect your assets from inflation and devaluation of stocks.

Physical gold stronger in times of financial crisis

Financial crises form the moment when the true character of investments becomes visible. In periods of economic stress, when confidence in markets and institutions declines, investors seek certainty.

Historically, physical gold fulfills a unique role in such situations as a safe haven and a means of protection against systemic failure.

Why crises make gold relevant

Financial crises often arise from a combination of factors, such as:

• excessive debt
• unstable monetary policy
• banks holding insufficient buffers
• geopolitical tensions

In such circumstances, trust in currencies, banks, and financial markets can evaporate quickly. Investments dependent on this system then come under pressure.

Physical gold, on the other hand, stands outside the financial system and retains its appeal precisely during these periods.

Physical gold vs. gold stocks in times of crisis

An important distinction in crisis situations is the difference in behavior between physical gold and gold stocks:

• Gold stocks remain sensitive to stock market dynamics, liquidity pressure, and corporate risks
• Physical gold retains its value as a precious metal and remains independent of markets

As a result, gold stocks often function as a risk asset, while physical gold acts as a stabilizing factor.

Protection against inflation and currency devaluation

In the long term, inflation and currency devaluation pose one of the greatest threats to wealth. When prices rise structurally, money loses its purchasing power. What is sufficient today to buy goods or services will be worth less tomorrow.

Precisely in this tension, physical gold is often deployed as protection against the creeping effect of inflation.

What is inflation and why is it problematic for investors?

Inflation means that general price levels rise and currencies lose value. This can have various causes, such as:

• increase in the money supply
• low or negative interest rates
• rising government debt
• disruptions in global supply chains

For investors, inflation means that:

• savings slowly decrease in value
• fixed returns (such as interest) lose their purchasing power
• financial planning becomes more difficult

Physical gold as inflation protection

Gold is often seen as a natural hedge against inflation. The main reasons for this are:

• Scarcity: the global gold supply grows only limitedly
• Intrinsic value: gold has value independent of currency
• Global acceptance: gold is recognized and traded internationally
• Historic preservation of purchasing power: gold retains its real value better than many currencies over the long term

When the purchasing power of money declines, the demand for gold as an alternative store of value often rises.

The price of gold coins and bars is less volatile

Volatility refers to the degree to which the value of an investment fluctuates. On this point, physical gold differs fundamentally from gold stocks. Where gold stocks are often characterized by sharp price movements, physical gold is known for its relative calm within a portfolio.

Gold stocks are sensitive to multiple factors simultaneously: the gold price, corporate results, geopolitical developments, regulations, and general market sentiment.

This makes them volatile and sometimes unpredictable. Prices can rise sharply in a short time, but fall just as quickly.

Physical gold typically has a less erratic price trend. Because it does not represent a company and has no profit expectation, its value is primarily determined by supply and demand for the precious metal itself.

The price of golden coins and bars is less volatile than the price of gold ETFs or stocks.

The 'Mine-to-Margin' paradox: Why a high gold price is not enough

A common fallacy is that gold mining stocks rise 1-to-1 with the gold price, or even work with leverage. In reality, however, we often see the so-called Mine-to-Margin Paradox.

Gold mines are industrial companies with enormous operating costs. When there is high inflation, the gold price often rises, but the costs for the mines rise even harder.

• Energy costs: Mining is energy-intensive. Rising oil prices mean directly higher costs for diesel and electricity to run machines.
• Labor and material: The costs for skilled personnel, steel, cement, and machinery have risen drastically in recent years.

Liquidity and accessibility of gold

Physical gold is easily liquidated and can quickly be converted into cash. In times of crisis and need, it is immediately available, without depending on the performance of financial markets.

Investors can easily sell their gold to local gold dealers or via specialized platforms, ensuring a high degree of accessibility.

Protected against cyber threats

Cyber threats are commonplace today. Physical gold poses no risk regarding cyber threats and digital attacks that can hit investment portfolios.

Gold stocks and other digital investments are susceptible to hacks, system failures, and other cyber incidents. High digital security does not mean that the risks of loss through cybercrime can be completely eliminated.

Conclusion: why physical gold is considered safer than gold stocks

Gold stocks can be attractive for investors looking for returns and willing to take extra risk. On the other hand, these investments are sensitive to company, market, and systemic risks.

Physical gold offers:

• direct ownership
• no counterparty risk
• protection against inflation
• independence from the financial system
• stability in times of crisis

For these reasons, physical gold is considered by many investors to be a safer form of gold investment than gold stocks.