Gold powers ahead and its paper-derivatives, mining stocks, lag behind - once again. Same story as last year - or is it?

Which should you be in? Stocks, or stacks?

Here is a gut level test: Which one sounds more solid, more appealing, more reliable to you?

A "stock" of something is a paper that says

"Thanks for entrusting this company with your heard-earned money. We'll try to make the best use of it, but ... well, you know how things can go wrong sometimes, so, if they do - don't blame us!"

A stack of something, on the other hand (depending on its height), is something that says:

"Sit down and rest on me. I'll be there for you when flying doo-doo meets the fan paddles. I will not go away."

There is no better way to make that point visual than the following chart:

Witness the huge up-and-down swings of the Gold Bugs Index (HUI) since 2003. (Unfortunately the time scale on the bottom gets messed up when trying to extend the time horizon on Stockcharts' set up). While establishing this giant sideways pattern, gold quietly and solidly kept moving up - and up - and up.

Fortunately, the latter fact helps to make one thing very clear: Once the HUI breaks out of its three-year consolidation pattern, it will make some serious fireworks! In that respect - and in that respect only - can one make an argument that stocks are "better" than bullion.

But, at rock-bottom, gold stocks have really only one advantage over gold: Depending on the phase of the investment cycle you happen to be in, this advantage can be huge - or it can actually be a negative.

That advantage is - familiarity.

Currently, this advantage is huge. A stock is a stock. Non-PM investors may be unfamiliar with the concept of investing in something that moves with the price of gold - but they are very familiar with how to buy, hold, and sell stocks.

A stock is a stock, and any broker can buy one for you (and make his commission off you), whether it's based on gold or something else. So,

• once regular investors figure out that - this year at least - their favorite run-of-the-mill stocks are not rising along with the price of gold as they did last year,

• once they witness almost the entire spectrum of equities fall right along with treasuries, real estate, and their retirement account balance,

• once the economy's current 'soft patch' turns into a swamp hole, and people start wondering how the heck they're going to pay for this winter's heating bill and how they will still be able to afford the drive to work and back,

• once all of these things come about, gold stocks will hold their triumphant return into Joe Blow's investment portfolio.

And that means they will blow sky-high. They will shoot way past the price of gold, again, but as before, they will also return to earth - again - while gold just keep on chugging.

When they do return to earth, it will be a different world down here, though.

It will be a world none of us have experienced. If you are over eighty, you may have some conscious memories of it, but all the rest of us will be in uncharted territory.

The risk of what happened to the dollar today, Thursday, October 6, 2005, (i.e., a 1.7 percent loss against the euro and Swiss Franc) will continue for many days, weeks, months, and years to come. It can even become the norm. Neither the euro nor the Swissie will offer any real protection against that - and neither will most gold stocks, when that time comes.

The point is this: Gold stocks can't be "better" than that which drives them. Their price depends on the price of gold. Although the stocks often function as a lead indicator for gold in the short to medium term, gold is the true lead indicator for gold stocks long term. Solid appreciation and security lie in gold alone. Crazy appreciation and in-security are the lot of gold stocks. The point of investing in gold stocks is to (hopefully) make fiat money. The point of investing in gold is - to have gold.

The trick lies in knowing when to get out of gold stocks or, in keeping with the title of this essay, when to turn stocks into stacks. When that time comes, those who sell recommendations for gold stocks will have a serious conflict of interest, all of a sudden.

Will they tell you to get out of what is making them money?

Caveat investor!

Got gold?