Mining ETFs Ride The Gold Rally

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Gold prices have jumped 26% in the past six months, but shares of companies that mine the precious metal climbed four times as fast, leaving investors to mull the best route to returns.

With the U.S. dollar sinking to its weakest level since early January, the spot price of gold bullion, now around $935 an ounce, is moving back toward $1,000. Speculating on futures contracts and picking individual stocks is too difficult for the average investor. Many people are turning to exchange-traded funds, which can reduce risk.

On Wednesday, London's World Gold Council said first-quarter demand for gold rose 38% from a year ago to 1,015 metric tons. Almost half of that gold went to ETFs or similar investment vehicles, a 540% increase.

A large portion of this bullion flowed to the SPDR Gold Trust (GLD) and its smaller brother, the iShares COMEX Gold Trust (IAU), which have market capitalizations of $33.3 billion and $2.1 billion, respectively. Both funds have earned B-plus ratings, or "buy" recommendations, from TheStreet.com Ratings.

These ETFs, which track gold prices, are easier to buy than bullion but more vulnerable to price fluctuations. If bullishness wanes before the industrial need for gold rebounds, prices could drop. The World Gold Council said jewelry demand slid 24% to just 339 metric tons while demand for industrial and dental use fared worse, off 31% to 80 metric tons.

While gold funds might do well in the near term, ETFs that hold mining stocks might be safer bets. Mining companies can benefit from gold exploration and production even if prices advance modestly.