Nathan Slaughter

Want to know the secret to a 669% gain in gold stocks? I'll tell you in a second, but first, some background...

If you don't know what gold stocks are, they're pretty straightforward.

Gold stocks consist of the gold miners, the companies that actually pull the yellow stuff out of the ground. I prefer gold stocks to bullion for a couple of reasons.

For one, many miners pay regular dividends -- whereas, to paraphrase Warren Buffett, gold bars just sit there and look at you.

But more important -- gold stocks offer considerable leverage over owning physical bullion. As the price of gold increases, production becomes more profitable, justifying a higher stock price for gold stocks.

That's not to mention that when gold prices increase, the miner's reserves also become more profitable. Because miners often have reserves equal to 10 times their production rate, it's easy to extrapolate the total profit increase from a rise in the price of gold.

But, that said, this is the part where most investors mess up.

See, novice investors tend to think that if gold is poised for a big move, then any gold-mining stock will take you along for the ride.

But that simply isn't the case.

Take shares of Novagold Resources (AMEX: NG) and Buenaventura Mining (NYSE: BVN) for example. In that past five years, Novagold has lost 10% of their value during a gold bull market. Meanwhile by comparison, Buenaventura Mining has advanced 207% -- and it sells the exact same metal.


Nathan Slaughter

Nathan Slaughter is Chief Investment Strategist of Market Advisor, Scarcity & Real Wealth, and Energy & Income at StreetAuthority.com.