"Gold mining stocks [are] a more risky but more profitable way to invest in gold," says Alix Steel at TheStreet.com in New York.

"Gold bullion is defense. On the offensive side," agrees Charles Oliver of Sprott Asset Management in Toronto, "if you want capital gains, [you want] gold stocks.

"We're in a bull market in gold and, generally speaking, most of the time gold stocks will outperform bullion."

Thing is, that period of time – "most", as Oliver says – sits oddly inside the last 10 years of rising gold prices. TV football pundits would call it a game of two halves (football being a game of foot and ball, of course, rather than helmets, armor and cheerleaders).

Because over the first half of the bull market to date, gold stocks far outperformed the metal. Over the second half, in contrast, gold has matched and then beaten both the leading gold-equity funds and stocks, on average – and with significantly lower volatility, too.

* Data to end-May 2010

** Daily volatility, rolling 1-month. Lower is better for sleeping at night.

XAU             Philadelphia Gold & Silver stock index

HUI              Amex Gold Bugs stock index

USERX          U.S. Global Investors Gold and Precious Metals Fund

USAGX         USAA Precious Metals and Minerals Fund

TGLDX Tocqueville Gold Fund

INIVX            Van Eck International Investors Gold Fund

MRCGLDA LN Equity Blackrock Gold & General (£)

Take from this what you will, but between 2000 and 2005, gold priced in Dollars rose 55%. The HUI index of 16 leading US-listed mining stocks added 195% (excluding dividends). Tocqueville Asset Management's Gold Fund rose 190% by value.

From 2005 to end-May 2010, however, gold rose 183%, while the Tocqueville fund rose 177% and the HUI index of producer stocks rose 116%.

Sure, there were better-performing gold stocks (Randgold's Nasdaq listing, GOLD, has more than quintupled in price since Jan.'05). There were better-performing funds over the last five years too, including the USAA Precious Metals and Minerals Fund (USAGX) and Van Eck International's Investors Gold Fund (INIVX).

But the apparent "leverage" to gold for which producers and actively-managed funds are recommended has evaporated over the second half of gold's 21st century bull run so far. More telling still, it's actually worked against gold equities and funds amid the financial crisis' greatest points of stress.

"When you buy or track the underlying metal – rather than investing in producer stocks – you don't get management risk, political risk, corporate tax, permitting risks and so on," said ETFSecurities' Scott Thompson this week.

You could say he was talking his book. (So are we here at BullionVault, naturally.) But what you do get when you buy gold – and what isn't offered by mining stocks or actively-managed mining-stock funds – is just a lump of metal, used to defend and store value, almost universally, for perhaps 7,000 years or more. That rare, shiny lump is as far as you can get from the growth-driven aims of most financial analysts and journalists today. Despite the worst recession and loss of global investment wealth since the 1930s, they'll still look for growth – and juiced-up profits – even from an unyielding lump of gold.

How much further might gold stocks and gold diverge from here? It might well depend on just how much deflation – capital destruction and "negative growth" – still lies ahead.

Adrian Ash

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK's leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – winner of the Queen's Award for Enterprise Innovation, 2009 – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2010

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

-- Posted Friday, 4 June 2010 | Digg This Article