Gold stocks look attractive to many investors in a time of global turmoil in financial markets and stock markets. But our view all along has been that gold stocks are rarely if ever an attractive place to invest, compared to other resource-sector investments like oils and other mines, and there is no compelling reason to put up with the disadvantages of gold stocks today.

Some enthusiasts of gold stocks feel it’s a travesty to lump gold in with mere industrial commodities. They put gold in a category of its own. Gold is different from other commodities, of course, due to its scarcity, its special physical characteristics like freedom from tarnishing and malleability, its unique suitability for use as a medium of exchange, and its place in the world’s financial history.

But that specialness doesn’t make it an attractive investment. In fact, it detracts from gold’s investment appeal. Because of the strong attachment that gold enthusiasts feel to the metal, they bid up the price of gold stocks out of proportion to the profits those mines are likely to produce.

They are willing to pay two or three times as much for a dollar in profit from a gold mine, compared to a dollar in profit from a base metal mine or oil well.

As a result, you can’t earn a decent current return on the income from a gold mine. You can only make real profits in gold stocks from capital gains. But your gold stocks can only generate capital gains for you if the price of gold goes up, or if the gold prospect you’ve invested in discovers a commercially mineable gold property, or the gold miner you’ve bought discovers more gold.

Gold hit bottom in 1999, then went sideways in a trading range for a couple of years. The current rise really started from around $275 an ounce early in 2002. Gold rose to over $1,011 U.S. an ounce in March, 2008, but has moved down since.

Gold prices could return to over $1,000 an ounce, or even move higher. But, unfortunately, most gold stocks are still well ‘ahead of the market’, as the saying goes. They trade as if gold has already gone up well above current levels. So if the price of gold puts on a feeble rise, much less goes sideways or downwards, buying these gold stocks now will give you a feeble return at best. Instead, you may lose money.

Even if you could succeed in the impossible task of predicting supply and demand for gold, it wouldn’t do you any good. Unlike other commodities, gold doesn’t really get consumed. Instead, it just piles up in jewellery, bank vaults and so on. Gold supply and demand change continually, in response to the gold market’s emotional reaction to news and economic events.

That’s why we will generally continue to recommend other stocks for the Resource stocks in your portfolio, rather than gold stocks.