How to spot the best gold stocks with the lowest risk

Gold could eventually surpass its recent highs of over $1,000 U.S. an ounce. That’s mainly because investors fear that low interest rates and government stimulus spending will spur inflation. Gold prices should also continue to gain as the credit crisis makes it harder for gold companies to fund new projects and expand production.

High gold prices will push up the value of gold shares. However, the best gold stocks don’t depend on high gold prices alone to make a profit. Here are three important factors that separate the best stocks from the average ones:

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1. Cost of production: It isn’t hard for a gold mining company to make money when gold prices are high. However, it’s always less risky to invest in stocks with a low production cost per ounce. With low production costs, the best companies make lots of money when the price of gold is high, but still make money when the price falls. That cuts risk. One such company is Newmont Mining Corp.

You can read more about Newmont in Our Top Choice in Gold Stocks. Newmont is a recommendation in our Wall Street Stock Forecaster newsletter.

2. Reserves: When you invest in any resource stock, gold included, you need to look at how long the company’s reserves are likely to last. Those with low reserves need to have consistent success in their exploration programs to maximize the production of the mine and the surrounding area. That success is far from guaranteed.

Even if the company has strong reserves, the best gold stocks with the least risk also have a diversified reserve base. That way they are not dependent on a single mine’s production or political stability in any one country.

Gold companies can also increase their reserves by making acquisitions, but with gold prices as high as today, that can be a costly way to expand.

3. Development: Some of the most highly promoted gold mining stocks are penny stocks which have yet to produce an ounce of gold. Many must still add to their reserves, invest in mine-feasibility studies, and raise a lot of money before they go into production. The prospects for most of these penny-mine properties, even though they may be in areas with production from existing mines nearby, are far from certain.

Like Newmont, the best gold stocks have strong reserves, low production costs and are already producing gold. These types of companies can help you to profit from gold investing while minimizing many of the risks associated with it.