Gold Stocks vs. Physical Gold

An often discussed topic is whether one should own gold stocks or the actual physical metal.I'll be honest with you - I'm leaning toward holding physical gold.Here's my reasoning.It's very simple.

Let's ask the question.Why does one own gold stocks?Answer?Because they expect gold prices to rise.Any answer you give after this, takes second place, third, fourth, whatever!

Why does one own physical gold?Answer?Because you expect gold prices to rise.Basically the same answer.

Here's the catch.Rising gold prices does not guarantee rising stock prices.There's a multitude of variables, not the least of which is that the more gold you take out of a mine, the closer you get to having taken all the gold.I don't care what mine you own, every ounce of gold taken out of it brings you that much closer to the last ounce it can produce.

This brings up the next point.If one mine produces more profit than the next, which stock would you buy?Naturally, the one that produces at the least possible cost for the highest possible profit should get the nod.

And what happens when there is an accident?The mine shuts down, lawyers take over and no matter how high gold goes, your mine is out of the game.

Bottom line is there are too many variables that can affect a stock value beyond just the price of gold.And if gold goes down in value, mines can easily go bankrupt but gold, on the other hand, has never been worth zero.

I'm reading an article in Bloomberg Businessweek (August 30 - September 5, 2010) about billionaire Thomas Kaplan who is said to be an Evangelist for gold.In the article we find that gold has risen 13% this year, in line with its performance over the last 10 years, while mining stocks have fallen 9.7%.

The article further points out, "The Financial risks of mining show up in their stocks, especially compared with gold prices."

Let's further note, that the more difficult it is for mining companies to produce gold, the higher the gold price goes.

Moral of the story?Physical gold is not only a hedge against uncertainty, inflation and a falling dollar but also a hedge against falling production and rising production costs.