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By David Berman

If you embrace gold and laugh at risk, then maybe it’s time to look beyond bullion and the household names in the mining sector. The alternative? The wild and wicked world of small-capitalization gold stocks.

For sure, this is no place for anyone who likes predictable earnings and steady dividends, or dreads the thought of awakening to news of a tin-pot dictator nationalizing your mine.

And don’t even bother to argue that gold has little intrinsic value: I’ve made it before, when gold hit $1,000 (U.S.) an ounce and at every $100 an ounce gain since then.

But it is hard to ignore that some of Canada’s smaller gold companies have blossomed with the bull market in gold, providing a wonderful way to leverage a bet on the underlying commodity.

Detour Gold Corp. (OTCPK:DRGDF) is a great example. The share price has surged a total of 680 per cent over the past five years, more than four times the gain in gold and more than 12 times the gain of big-cap producers such as Barrick Gold Corp. (ABX) and Goldcorp Inc. (GG) over the same period.

Rising gold prices have certainly helped the stock. So, too, has the company’s relatively small size: Detour’s market cap, which is the value of all outstanding shares, is only $3.1-billion (Canadian) – a fraction the size of the biggest players.

This inspires dreams of earnings explosions when production gets going (right now, Detour doesn’t even have any revenues), and who’s going to rule out the possibility of another gold producer making a takeover offer? Bigger companies offer neither fantasy.

Detour is a shining example of a winning gold stock, but it is not alone. Premier Gold Mines Ltd. (OTCPK:PIRGF), Semafo Inc. (OTCPK:SEMFF) and Rubicon Minerals Corp. (RBY) have produced stellar five-year returns, ranging between 167 and 347 per cent, that have beaten gold.

This is a backward-looking analysis, of course. But it demonstrates why these smaller companies can be so alluring when gold is shining.

Granted, the risks are enormous. For one thing, share-price swings can test your fortitude. Consider NovaGold Resources Ltd. (NG): Its shares fell 54 per cent in a single day in 2007, when it called off construction of a copper-and-gold mine because of surging cost estimates. The shares have risen a total of 1,500 per cent since December, 2008, but are down 55 per cent over the past five years.

Smaller companies face other risks, too. Despots have a nasty habit of nationalizing mines on a whim and once-promising gold deposits can – whoops! – disappear.

And then there is the price of gold itself. Big producers can withstand setbacks with their financial heft, but smaller firms don’t have as much flexibility, making them far more sensitive to commodity price fluctuations.

If gold slides, it’s going to hurt. But if gold keeps rising, small is beautiful.

Disclosure: none

Source: Leveraging Gold With Canada's Smaller Companies