Thanks to high gold prices and industry consolidation, 2019 is shaping up to be a golden year. Gold prices started to rally in late 2018 as economic and geopolitical concerns sent shock waves through global stock markets. Uncertainty in the market brings gold's appeal as a safe-haven asset to the forefront, and persistent economic tension could keep gold prices on a firm footing throughout 2019.

Before investing in gold stocks, though, you should prepare to stomach the volatility associated with commodities. Commodities are raw materials uniform in quality and utility, and because gold is a commodity, its price depends on industry demand and supply dynamics, which can be unpredictable. As the price of gold fluctuates, so do the fortunes of gold companies and their stocks.

A close-up view of gold bars.

Investing in gold stocks is a smart way to diversify your portfolio. Image source: Getty Images.

Owning gold stocks is one of the best ways to gain exposure to the precious metal, as well as to diversify your portfolio. Investors who own stocks of low-cost gold producers that are also generating strong operating and free cash flows should see meaningful returns in the long run. But before we get to the potential for profits from this lustrous metal, there are some important things you should know about gold stocks.

What is gold and what is it used for?

Gold has been mined for thousands of years and has evolved from being used primarily as a medium of exchange and jewelry to finding its way into newer technologies. The yellow metal has come a long way and is now one of the most valuable modern commodities. But what makes gold so expensive that one ounce sells for a whopping $1,200 today?

To start, gold is a rare element that's hard to extract from under the ground, where it's usually found. The World Gold Council says it's easier to find a 5-carat diamond than a 1-ounce gold nugget! Gold is also one of the most malleable, soft, and ductile metals, which means it can be stretched, hammered, and molded into any shape without breaking. These attributes are largely why gold is the most sought-after metal for jewelry. Globally, jewelry accounts for nearly half of the total demand for gold.

Commercially, gold's high thermal conductivity and resistance to corrosion, among other chemical characteristics, make it a crucial input in several industries, especially electronic components, medicine (particularly dentistry), aerospace, and glass making. Central banks across the globe also hold tons of gold in reserves.

Given gold's scarcity and vast variety of uses, owning gold in some form is a prudent investment decision. One way to accomplish this is by investing in gold stocks.

What are gold stocks?

Gold stocks are simply stocks of companies that revolve around gold. The industry mainly comprises gold mining companies that mine and sell gold, so when you buy a gold company's stock, you effectively purchase an ownership stake, and then the company's performance determines your returns.

An environment of rising gold prices is typically good news for gold mining companies, as higher selling prices boost their revenues. So far, 2019 is turning out to be a positive year for gold prices, making it an opportune time to buy gold stocks for the first time or to add to your existing position.

In fact, there couldn't be a better time to buy gold stocks, given the ongoing industry consolidation. Two massive recent deals -- Barrick Gold's (NYSE:GOLD) merger with Randgold Resources and Newmont Mining's (NYSE:NEM) impending acquisition of Goldcorp (NYSE: GG) -- are creating the world's two largest publicly traded gold mining companies. More recently, Barrick Gold even made a takeover bid for Newmont Mining, but the two gold mining giants have only agreed to combine their operations in Nevada in a joint venture as of this writing. These developments make investing in gold stocks now incredibly interesting.

The industry isn't just mining companies but also gold streaming and royalty companies, which act as middlemen in the sector. Gold streamers like Franco-Nevada (TSX:FNV) and Royal Gold (NASDAQ:RGLD) are among the largest players in the industry today.

List of the 10 largest gold stocks

Gold Stock Business Model Market Capitalization*
Barrick Gold Mining $23.29 billion

Newmont Mining

Mining $18.33 billion
Franco-Nevada Streaming (gold, platinum group, and oil and gas) $14.51 billion
Agnico-Eagle Mines (NYSE:AEM) Mining $10.4 billion
Goldcorp Mining $9.67 billion
Kirkland Lake Gold (NYSE:KL) Mining $7.62 billion
Royal Gold Streaming (gold) $6 billion
AngloGold Ashanti (NYSE:AU) Mining $5.4 billion
Kinross Gold (NYSE:KGC) Mining $4.29 billion
B2Gold (NYSEMKT:BTG) Mining $2.96 billion

*Market capitalization as of March 13, 2019. Source: Yahoo! Finance.

Other notable gold stocks include miner Yamana Gold (NYSE:AUY) and streamer Wheaton Precious Metals (NYSE:WPM). However, Wheaton derives a major chunk of revenue from silver, which is why it's better known as a silver stock.

So which gold stocks are the best buys for 2019? First, let's learn why you want to invest in gold stocks in the first place.

Is gold a good investment?

There are many moving parts that impact the price of gold. Nearly 50% of the demand for gold is in the form of jewelry, according to the World Gold Council, primarily from markets like China and India, where gold has cultural and sentimental value.

In the financial markets, gold is typically considered a hedge against inflation and uncertainty, which is why global events like Brexit and trade wars can fuel demand, driving up prices of the metal. Central bank policies such as interest rates, fluctuations in the value of the U.S. dollar, and macroeconomic data are other factors that can affect gold prices.

Unsurprisingly, any gold-related investment comes with its fair share of volatility and risk. Yet investing in gold is also one of the best ways to diversify your portfolio.

Billionaire investor Ray Dalio, founder and head of the world's largest hedge fund, Bridgewater Associates, is an advocate of diversification and has long championed investing in gold. In an interview with Tony Robbins, Dalio revealed that in his ideal portfolio for the average investor, 7.5% is gold.

Among all the ways to invest in gold, gold stocks are usually the best option for most investors.

Why should you invest in gold stocks?

Buying physical gold in any form -- bars, coins, medals, or even jewelry -- is the most direct way to gain exposure to gold prices. But buying physical gold also means you have to pay high commissions and bear additional costs and risks related to the transportation, storage, and insurance of the precious metal.

Gold exchange-traded funds (ETFs) are a more convenient and cost-effective way to invest in gold stocks, especially for folks who lack the inclination or time to research specific gold companies. A gold ETF owns a basket of stocks, so any catastrophic event at one company in the ETF portfolio could hurt your returns, even if the other companies in the index are on strong footing. Conversely, you don't have to be a stock-picking guru to enjoy the gains achieved by the sector winners if you invest in a gold ETF.

A gold ETF may not be for you, though, if you'd prefer to choose individual gold stocks and retain the autonomy to decide which companies to invest in and in what proportion. Gold stocks offer the highest return potential to investors, because in theory, a company's share price should eventually reflect the company's operational and financial growth. That means shares of a fundamentally strong gold company that's maximizing returns on invested capital and is committed to shareholders can earn investors strong returns in the long run, even in a low-price environment for gold. Of course, investing in stocks itself is risky, and it's no different with gold stocks.

The risks of investing in gold stocks

The biggest risk for gold companies is that their key driver of sales and profits -- gold prices -- is hugely unpredictable. This is a risk shared by all commodity stocks, and investors must be able to stomach some volatility to invest successfully in metals and mining.

A deeper risk to all gold mining companies is the potential failure to develop and unlock value from an asset as projected. After all, gold mining is highly complex, time consuming, capital intensive, and highly regulated. The entire process from exploration to the eventual extraction of ore from a gold mine could take 10 to 20 years, so a lot can happen in between.

Barrick Gold's Pascua-Lama project is a fine example. When Barrick started construction at the mine in 2009, it projected average annual gold production between 750,000 and 800,000 ounces in the first five years, starting in 2013. But the project was mothballed in 2013 when it ran into regulatory hurdles over environmental concerns. Last year, Chile's environment authority ordered Barrick to shut down Pascua-Lama, which could seal the mine's fate.

Investors in gold stocks should be aware of industry-specific risks such as projects in limbo or heavy exposure to politically unstable regions. Be sure to factor in particular risks to the subsector occupied by the gold company you're considering backing.

What is gold streaming and how is it different from gold mining?

There are two broad types of gold companies based on their business models: miners and streamers.

Gold mining is the extraction of gold from underground mines. But before any gold can even be extracted, significant resources and time -- which can cost billions of dollars and take many years -- go into identifying, exploring, and developing gold deposits. Miners also have to cross several regulatory hurdles and obtain permits and licenses to be allowed to construct a mine. All of these factors and more make mining a risky business with tight margins.

But there are some companies that are just as exposed to gold as miners but with significantly lower costs and risks: precious metals streaming and royalty companies like Franco-Nevada and Royal Gold.

Gold streaming companies don't own and operate mines. They enter into "streaming agreements" with mining companies under which they secure the right to purchase a predetermined percentage of gold (and any other metal agreed upon) from the miner in the future, and at a price considerably below the spot gold price. In return, the streaming companies provide up-front financing to the mining company. Eventually, streaming companies generate revenue from the sale of the metal, just like mining companies.

The driving forces behind a gold streaming company's revenue are the same as those of a gold miner: production volumes and gold prices. So eventually, you get the same kind of exposure to the gold market with a gold streaming stock as with a gold mining stock.

The big difference, and one that works in favor of investors in the long run, is that a gold streamer doesn't produce gold, so it operates at substantially lower costs than a miner does. Gold streaming companies don't have to bear any of the costs and risks associated with mining, and they can buy gold at reduced prices. For example, Royal Gold's cost of sales, or the purchase price it paid for gold and other metals like silver and copper under its streaming agreements, was just $83.8 million, compared to its revenue of $459 million, in its fiscal year 2018, which ended June 30.

Of course, it's not all hunky-dory for precious metal streamers. There are two major drawbacks to the streaming business model.

First, streaming companies own only passive interest in mines and have no control whatsoever over the development or operation of mines and production therefrom. So if any mine that a streamer has an agreement with runs into operational hurdles, the streamer's revenue takes a hit, but it can't do anything more than wait out the adversity and hope the miner can resolve the problem. Royal Gold faced such delays last year.

The second risk to gold streamers is leverage and share dilution. Streaming companies often resort to debt or issuing new shares of stock to raise the funds to finance deals with miners, which can weaken their balance sheets.

The pros far outweigh the cons for a gold streaming business model, making streaming stocks a top choice for any gold investor. My five top gold stock picks for 2019 and beyond include gold streaming companies. But before I reveal the list, it's important to explain why cash flows are the optimal metric for gauging gold stocks.

How to value and buy gold stocks

Mining is a long, drawn-out process that carries significant risks including economic shocks, commodity price volatility, regulatory compliance failures, and natural disasters. Any event that impairs a miner's ability to develop a mine or a mine's operational capacities could result in the depreciation of the asset's value. A miner has to regularly look for signs of any potential change in an asset's value as per accounting policies and record impairments as necessary. Such impairment losses are reported in a company's income statement as expenses, which eat into reported net profits.

While one-time asset writedowns and impairments are part and parcel of the gold mining business, they can distort the true picture of the health of the company's operations, especially in the case of streaming companies like Royal Gold and Franco-Nevada that do not actually own the impaired asset.

For example, Royal Gold reported a noncash impairment charge of $239.1 million in its fiscal year ended June 30, 2018, related to Barrick Gold's Pascua-Lama mine, resulting in the streamer reporting a net loss of $113.1 million for the year despite generating record revenue. Adjusting for the impairment charges and one-time tax items, Royal Gold's adjusted net income grew 14% in FY 2018. Royal Gold's operating cash flows also hit record highs in the year.

This example demonstrates why it's more prudent to analyze Royal Gold based on its cash flows than on its earnings. Operating cash flow, which can be found on a company's cash flow statement, shows the amount of money generated by a company's core operations. Cash flows are more relevant than net income for gold companies, which also means that gold investors should utilize cash flow-based valuation metrics instead of the popular price-to-earnings ratio (P/E ratio). When you analyze gold stocks, pay closer attention to cash flows.

There's another important operational metric used in the gold industry that every gold investor should be aware of: all-in sustaining costs (AISC). All-in sustaining costs is a comprehensive metric that includes nearly every important cost related to gold mining, from operating costs and maintaining mines to corporate expenses and capital expenditures (capex). A lower AISC indicates greater cost efficiency. In an industry in which factors driving revenue are largely unpredictable, cost efficiency holds the key to profitability.

Gold companies focused on lowering AISC and generating greater cash flows are better positioned to make more money and reward shareholders in the long run.

The best gold stocks to buy in 2019

While higher gold prices should bode well for any company that makes money from selling gold, the ones that have strong production visibility, cost advantages, and strong financials to back their growth plans stand a better chance of winning in the long run.

With that in mind, I believe Royal Gold, Barrick Gold, Agnico-Eagle Mines, and Franco-Nevada are among the best gold stocks to buy now. For investors looking to add a broader array of gold stocks to their portfolio while avoiding stock research, I recommend this gold ETF: VanEck Vectors Gold Miners ETF (NYSEMKT:GDX).

The winning gold stock you can buy for cheap

Royal Gold is a gold streaming and royalty company that derived 77% of its revenue from gold in its 2018 fiscal year.

Royal Gold's history is worth a look: It was founded in 1981 as an oil and gas exploration and production company, and it was only after oil prices crashed years later that Royal Gold shifted focus to gold, eventually entering the gold streaming business in 1987.

Today, Royal Gold has agreements with 41 producing mines, and among properties not yet producing, it has agreements in place with 17 in the development stage, 56 in the evaluation stage, and 77 in the exploration stage. Royal Gold generated nearly 76% of revenue from only six mines in its last fiscal year. Some mines, such as Goldcorp's Penasquito and Barrick-Goldcorp's co-owned Pueblo Viejo, are not only among the world's largest gold mines, but they have expected mine lives of at least 10 years each.

In fact, Royal Gold has agreements with three of Barrick Gold's five key mines, including Pueblo Viejo and Nevada-based Cortez and Goldstrike. Barrick's new CEO Mark Bristow calls them "world-class mines" where growth is a priority. In other words, these mines are among the few offering significant growth optionality to Royal Gold in coming years.

Royal Gold is already on strong footing, having generated record revenue and operating cash flow in its fiscal year 2018. Royal Gold's cash flows have risen steadily over the years, enabling the company to grow its dividend at a solid compound annual growth rate (CAGR) of 19% since 2001.

Royal Gold has a great track record of creating shareholder value, and with shares now trading considerably below their five-year price-to-operating cash flow average despite the company generating record flows, this is one top gold stock to consider buying.

This gold stock is undergoing a major transformation

Barrick Gold, the world's largest gold mining company in 2017 by annual gold production, took a major growth leap by acquiring Randgold Resources in a bid to remain the industry leader.

Barrick and Randgold's combined 2017 gold production of roughly 6.6 million ounces gives the new Barrick a considerable lead over rival Newmont Mining, which produced roughly 5.3 million ounces of gold in 2017. Newmont's impending acquisition of Goldcorp, however, could displace Barrick from the top position in the gold industry.

Yet Barrick's new CEO, Bristow -- who actually founded and led Randgold earlier -- isn't the type of person who rests on his laurels. Barrick stunned the market by bidding for Newmont Mining, which was rebuffed by the latter. Instead, the two companies are combining their operations in the high-potential Nevada region, targeting $500 million in annual pre-tax synergies for the first five years.

After its Randgold acquisition, Barrick now owns 5 out of the world's top 10 Tier One gold assets, including Cortez, Goldstrike, and Pueblo Viejo (60% ownership), with two other mines -- Goldrush/Fourmile and Turquoise Ridge (75% stake) -- that have potential to become Tier One assets. Barrick defines a Tier One asset as a mine with a life span of at least 10 years that produced at least 500,000 ounces of gold in 2017 at a total cash cost per ounce within the bottom half of the cost curve defined by research firm Wood Mackenzie, or less than $748 per ounce.

Barrick and Randgold's reported combined total cash cost for 2017 of $538 per ounce of gold also makes the combined company one of the lowest-cost gold producers in the industry. Barrick by itself was among the most cost-efficient gold producers, with a projected AISC of $765 to $815 per ounce of gold for 2018.

A graph showing the names of the global top 10 Tier One gold assets.

Barrick Gold owns five of the world's top 10 Tier One gold mines. Data source: Wood Mackenzie. Image source: Barrick Gold.

Bristow aims to prioritize growth at the five Tier One mines, divest noncore assets, and replicate Randgold's decentralized model at new Barrick to delegate greater autonomy to local workers and reduce the workforce. Bristow is also keen to settle Barrick's long-standing disputes, such as the one between the Tanzanian government and Acacia Mining, which is owned 64% by Barrick.

These initiatives, combined with the Nevada joint venture in which Barrick owns a 61.5% stake, should boost Barrick's cash flows and help it strengthen its balance sheet further. Before the Randgold merger, Barrick was focused on paring down debt and has nearly halved its long-term debt since 2015. Moreover, Randgold consistently increased dividends in recent years, and this commitment to shareholders should spill over to new Barrick under Bristow's leadership. In short, here's a bigger, leaner Barrick Gold in the making, which is why the gold stock looks good at a price-to-cash flow less than 9.

This gold stock could spring a surprise in 2019

Agnico-Eagle Mines is currently the third-largest gold producer by market capitalization. Given the ongoing consolidation in the gold industry, Agnico-Eagle Mines is likely to make a growth move soon.

Canada-based Agnico-Eagle Mines officially came into existence in 1957 when Cobalt Consolidated Mining Company, which was formed when five struggling silver miners joined hands in 1953, rechristened itself Agnico Mines. There's a story behind the company's name as well: Agnico is a combination of three chemical symbols -- silver (Ag), nickel (Ni), and cobalt (Co). In 1972, Agnico merged with Eagle Gold Mines to become Agnico-Eagle Mines, and then it listed its shares on the Toronto Stock Exchange and the U.S. Nasdaq.

Agnico-Eagle Mines has come a long way, now operating eight mines, including Canada's largest open-pit gold mine, Canadian Malartic, in a 50-50 partnership with Yamana Gold. In 2017, Agnico-Eagle Mines produced a record 1.7 million ounces of gold, exceeding its own estimate for the sixth straight year while bringing down costs along the way: In 2017, its total cash cost was only $558 per ounce of gold versus $640 per ounce in 2012, and AISC was $804 per gold ounce.

To be sure, Agnico-Eagle Mines' production is expected to drop in fiscal 2018 because of lower production from a couple of mines, but the miner is on track to grow its gold production to 2 million ounces by 2020 from roughly 1.53 million ounces in 2018, as its Nunavut assets, particularly Meliadine and Amaruq deposits, start production this year.

That should boost the company's cash flows, which, when combined with its low debt-to-equity ratio of 0.35, leaves it with ample room to make meaningful growth moves including acquisitions. In the past 10 years, Agnico-Eagle Mines' cash flow from operations has more than quadrupled, and it has paid out a dividend since 1983, rewarding shareholders with a 10% dividend increase in October 2017. That reflects Agnico-Eagle Mines' financial fortitude, making it one of the top gold stocks to buy for 2019 and beyond.

The best gold dividend stock

Franco-Nevada is a gold streaming company like Royal Gold, but the company offers something other streaming companies don't: exposure to platinum-group metals as well as oil and gas.

Newmont Mining acquired Franco-Nevada in 2002, only to sell its portfolio of royalty assets in 2007 to give birth to the precious metals streaming and royalty company, Franco-Nevada, as we know it today. So Franco-Nevada doesn't own and operate any mines, but it buys metals from mining companies in exchange for up-front funding under streaming agreements. In a royalty deal, Franco-Nevada finances the miners, but instead of getting metals in return, it receives a percentage of sales from the corresponding mine.

Franco-Nevada had streaming and royalty agreements attached with 51 producing, 35 advanced, and 208 exploration-stage assets that belong to some of the largest mining companies in the world, as of Nov. 5, 2018. Lundin Mining's Candelaria, Glencore's Antapaccay, Teck Resources' Antamina, and Coeur Mining's Guadalupe-Palmarejo are some of the largest contributors to Franco-Nevada's current gold production, while KGHM International's Sudbury mine in Ontario is its key source of platinum-group metals.

In 2016, Franco-Nevada made a bold bet by making a foray into oil and gas royalties with an investment in the STACK shale play of Oklahoma and the Permian Basin, an oil-rich area spanning west Texas and New Mexico. The company has invested roughly $860 million in U.S. oil and gas royalties in the past three years and expects oil and gas revenue to grow nearly 177% between 2017 and 2022, although it still aims to generate at least 80% of revenue from precious metals in the foreseeable future. For context, in 2017, Franco-Nevada generated roughly 77% revenue from gold, 16% from silver, and 7% from platinum-group metals.

Between 2008 and 2017, Franco-Nevada's gold equivalent ounce (GEO) production grew nearly fivefold, and revenue jumped more than fourfold. With high-profile gold mines like First Quantum Minerals' Cobre Panama ramping up aggressively to start production in 2019, Franco-Nevada foresees its GEO rising 17% by 2022, setting it up for strong cash-flow and dividend growth in coming years. So far, Franco-Nevada has diligently returned a good chunk of cash flows to shareholders in the form of annual dividend increases every year since 2008. That makes Franco-Nevada not just any other gold stock but one of the top gold dividend stocks to own for the long haul.

The ultimate gold investment for instant diversification

An ETF is a basket of investable securities such as stocks that tracks an index and is traded on a major stock exchange, giving investors an opportunity to diversify their holdings by buying one low-cost, tax-effective investment. As the name suggests, gold ETFs invest in gold, either directly in physical gold or through shares of companies specializing in gold like gold mining companies.

The VanEck Vectors Gold Miners ETF tracks the NYSE Arca Gold Miners Index, which comprises stocks of gold and silver companies listed on international stock exchanges. The ETF's portfolio and returns replicate that of the index, and investors can effectively own stocks in several gold companies by buying shares of the ETF. As of March 13, 2019, the ETF held 46 stocks, and its top seven holdings accounted for 47.38% of its net assets:

  • Barrick Gold
  • Newmont Mining
  • Franco-Nevada
  • Newcrest Mining
  • Wheaton Precious Metals
  • Agnico-Eagle Mines
  • Goldcorp

Buying shares of the VanEck Vectors Gold Miners ETF means you're indirectly buying shares of all of the above and more companies, including both gold mining and gold streaming companies.

Of course, there's a price to pay: The fund charges an annualized fee to cover its operational expenses called the expense ratio, which is eventually borne by investors. The VanEck Vectors Gold Miners ETF has an expense ratio of 0.53%, which means the fund will deduct 0.53%, or $5.30, for every $1,000 you invest.

Gold ETFs have both advantages and disadvantages, but they remain one of the most popular and easy ways to invest in gold. With assets under management (AUM) of nearly $10.6 billion, the VanEck Vectors Gold Miners ETF is the largest gold ETF that invests in gold companies. For investors looking for widespread exposure to gold in 2019 but not keen on picking individual gold stocks, this ETF is by far the best investment alternative for betting on the precious yellow metal.