The Ignorant Investor

Absolutely: getting a good return on gold depends on when you buy it. But while investing in gold is not like investing in a stock, investing in gold mining companies is an entirely different matter. Those companies do seek to expand market share (production) and increase profits, very much like companies in other resource industries, such as in the oil and gas industry.

There are many types of gold mining companies, and as in other industries, it can take considerable time and experience to invest wisely in this sector. For beginning investors, diversifying by dollar cost averaging into a no-load or low-load mutual fund which holds shares in many gold mining companies is a good way to begin. Many investment commentators suggest that one's holdings in precious metals, including gold itself - whether held as physical metal or in some surrogate form, such as the gold exchange traded funds - as well as gold mining companies, be limited to 5% or 10% of one's portfolio, and that's excellent advice when starting out.

For investors who are willing to put in considerable time and effort, it can be possible to obtain greater returns - with concomitantly greater risk - by investing in individual gold mining companies, particularly those which have some exposure to exploration for new gold deposits, or in expanding and developing existing deposits which will eventually become producing mines, or both. These companies often have greater upside potential than the larger producing companies. For instance, development-stage companies with significant numbers of 'ounces in the ground' often have their gold valued at around $20 to $30 an ounce, but when they spend the years required for feasibility studies, and commit considerable capital and labor to build a working mine and have demonstrated significant production, their reserve and resource ounces are often valued by the market at $100 or more per ounce. (These valuations are current as of January 2006, when gold is approximately $500 per ounce, and subject to change.) And companies with highly prospective properties or which have early exploration results can often see their shares rise two-fold to as much as to ten-fold when a major discovery is made and its magnitude becomes well quantified.

However, because of the risks involved, it is critical to identify companies with proven management and truly promising properties or economic deposits; there are some mining companies which are nothing more than 'stories.' In Canada, for instance, some companies' properties are derided as nothing more than "moose pasture." And even with good companies and properties, there are many risks: that the properties might ultimately turn out to not have economic quantities of gold; that technical problems in getting the ore out of the ground, the gold out of the ore; or the gold to market might arise; that the gold price itself might drop significantly; that costs for fuel, equipment, labor and other inputs might greatly eat into profits, if any; or that environmental or political events, including the actions of local and national governments, might make the properties uneconomic.
 

Some refinements to two sentences in the comment above:

... development-stage companies with significant numbers of 'ounces in the ground' often have their gold valued at around $20 to $30 an ounce, but when they spend the years required for feasibility studies and permits ...

And companies with highly prospective properties or even those which have early exploration results hinting that a significant deposit may exist can often see their shares rise two-fold to as much as to ten-fold when a major discovery is made - or confirmed - and its magnitude becomes well quantified.

Also, to add to the list of risks mentioned above: the risk that the company may "dilute" existing shareholders by issuing additional stock, as well as warrants and options that can be converted to stock. This frequently occurs either to raise additional cash to fund exploration, development, or the drive to production; or to line the pockets of ("incentivize") the company's officers and directors. This can significantly diminish the returns realized by early shareholders, as their share of the company's "pie" is reduced through the issuance of additional ownership shares to other investors.