When investing in gold vs silver, not all that glitters is worth the price. Here are our tips on what to do if you want to benefit from minerals like gold and silver.

Although investing in mining stocks can be highly volatile, they often make good long-term investments.

However, the gold-vs.-silver debate must factor in our conclusion: mining stocks or ETFs that hold those stocks make better investments than bullion for both silver and gold.

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Investing in gold vs silver: Mining stocks over bullion

Whether you want to buy gold or silver, we recommend staying away from buying bullion, coins (unless you collect them as a hobby) or certificates representing an interest in bullion. That’s because commodity investments such as gold or silver bullion do not generate income. Instead, they come with a continuing cash drain for management, insurance, storage and so on. You either pay these costs directly or through a premium built into the price of, say, a futures contract.

We feel that investing on the basis of rising and falling commodity prices, instead of in commodity-producing stocks, is more of a gamble than an investment.

A far better way to profit from gold is by investing in the stocks of gold-mining companies. That way, you benefit from increases in the price of gold, and you give yourself the potential for capital gains. You also save on the higher brokerage fees and commissions associated with other types of commodity investments.

Investing in gold vs silver: A look at “poor man’s gold”

Silver is sometimes known as “poor man’s gold,” because it attracts a lot of interest as gold prices reach levels that seem too expensive for the average investor. But prices of silver mining stocks tend to rise along with gold prices. That’s because when gold prices soar, investors see silver as less of an industrial commodity and more as a precious metal. Silver mining stocks tend to also follow a price surge in silver.

As mentioned, if you want to invest in silver, we think the best way to do it is through silver mining stocks or ETFs. We recommend staying away from silver bullion, and other silver bullion alternatives, such as so-called “junk silver” coins (these are common coins with no value to coin collectors, and that trade strictly on their silver content).

Investing in gold vs silver: Ways you can benefit from both

Whether it’s a Gold mine or silver mine, here’s how investors should look for in a precious-metal mining stock

● We generally stay away from mining stocks that operate in insecure and politically unstable regions.

● High-quality mining stocks should have strong balance sheets with low debt. Junior explorers and developers should have a major partner who can finance a mine to production.

● We always look at the market cap of mining stocks versus the estimated value of the mineral resource they have in the ground. We like a mining stock’s market cap to be no more than half the value of the mineral. We assume that the company will be able to expand its ore reserves after the mine opens, but if the mineral reserves are double the mining stock’s market cap, it provides a margin of safety.

● We look for steady production. Some of the most highly promoted mining stocks are penny stocks which have yet to produce. Many must still add to their reserves, invest in mine-feasibility studies, and raise a lot of money before they go into production. The prospects for most of these penny-mine properties, even though they may be in areas with production from existing mines nearby, are far from certain.

● We also recommend avoiding stocks that are trading at unsustainably high prices as a result of broker hype or investor mania.

Bonus Tip: Lowering your risk on your mining investments

We continue to recommend that you cut your risk in the volatile resource sector by investing mainly in stocks of profitable, well-established mining companies with high-quality reserves. Resource stocks as a group should make up only a limited portion of your portfolio—say less than 20% for a conservative investor or as much as 30% for an aggressive investor.

What is your preferred mineral choice for investment? Do you invest in it through the commodity itself or a mining stock/ETF?

What’s your preference—investment in gold or silver? Or do you find that they are both too unpredictable?