If you are wondering how to find the best gold companies to invest in for your portfolio, look no further. Here are our guidelines

Gold is the only commodity that rarely if ever gets permanently lost or consumed. This means that virtually every ounce of the metal that has ever been produced may one day come back on the market. That’s why it’s a mistake to try to predict gold prices as you would wheat prices, for example, by comparing estimates of supply and demand for the coming year.

The best gold companies to invest in offer gold mining stocks, and not just gold bullion. Unlike bullion, these stocks at least have the potential to generate income. High-quality gold stocks can pay off nicely by establishing new mines and raising their production, even if gold goes sideways for a lengthy period.

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Use caution even with the best gold companies to invest in to safeguard your portfolio

We now feel gold could well move higher over the longer term, although we expect it to remain volatile. Rising gold would mainly be driven by investor fears that still-low interest rates and government stimulus spending and deficits will spur inflation.

At the same time though, conservative investors should be careful when making gold investments, as they would be with any volatile commodity investment.

Note that regardless of what happens in the gold market, speculative and promotional gold stocks will make significant gains from time to time on hopes of a gold discovery. However, that’s always true of any sort of speculative or promotional stocks. Keep in mind that most investors who dabble in them still wind up losing money.

The best gold companies to invest in have sound reserves, are well financed, and operate in stable political regimes

When you invest in any resource stock, gold included, you need to look at how long the company’s reserves are likely to last. Those with low reserves need to have consistent success in their exploration programs to maximize the production of the mine and the surrounding area. That success is far from guaranteed.

Even if the company has strong reserves, the best gold stocks with the least risk also have a diversified reserve base. That way they are not dependent on a single mine’s production or political stability in any one country. Top gold companies can also increase their reserves by making acquisitions.

We generally stay away from gold mining companies operating in insecure and politically unstable regions like the Congo and Venezuela, or in countries with little respect for property rights and the rule of law, like Russia or Mongolia. Mining is inherently a politically vulnerable business; you can’t move the mine to another country, and local citizens sometimes believe that a foreign mining company is robbing them of their birthright, even though they need the foreign company’s capital and expertise to get any value out of the ground.

Use these seven guidelines to pick the top gold-mining stocks

1. To increase your gold returns, look for well-financed companies with no immediate need to sell shares at low prices, since that would dilute existing investors’ interests.
2. High-quality gold stocks should have sound balance sheets with reasonable debt. Junior mines should have a major partner who can finance a mine to production.
3. Another key ingredient is an experienced management team with a proven ability to develop and finance a mine.
4. We think you should avoid stocks that trade “over the counter,” where such things as regulatory reporting are lax.
5. We also recommend avoiding stocks that are trading at unsustainably high prices as a result of broker hype or investor mania.
6. Compare the market caps of the stocks with the estimated value of their assets or future earnings streams. Some need to quickly find a mineral deposit and begin production to justify the current share price and avoid collapse.
7. Above all, you should automatically rule out investing in companies that promote themselves too aggressively, or do so misleadingly. Success is more likely if the managers focus on finding or developing a mine, rather than touting their stock.

Bonus tip: Use our three-part Successful Investor approach to build a stronger overall investment portfolio

1. Invest mainly in well-established companies;
2. Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
3. Downplay or avoid stocks in the broker/media limelight.

What is your opinion on gold mining stocks? Are there commodity stocks you prefer that are more stable or valuable?