This Is How I Would Invest In Gold

I'm not much of a gold investor; however, as someone that likes a good value, the recent sell off in gold has caught my eye. I've never really understood why investors are so drawn to the metal, especially when I have concern that market manipulators are really a big problem. That being said, if I were to lay down a chunk of change on that shiny metal, other than to buy my wife a gift, I think I've found the investment of choice.

Before I get to that company, bear with me as I dig deeper into what I won't be buying. Topping the list is gold ETF SPDR Gold Trust . Because its job is to track the price of gold, you're basically holding paper that's worth is tied up in the market's sentiment. That just doesn't work for me, I'm an investor in businesses and not in ticker symbols.

The problem is, the gold mining business is a risky one, to say the least. The operational risks can really affect the performance of the company relative to its peers. Cost overruns when expanding production can be so severe it can lead to very costly future write-downs. Further, work stoppages are common -- just last week Barrick Gold was forced to halt construction work on the Chilean side of one of its mines, for the project is causing environmental damage.

To alleviate some of these operational risks I could invest in a top-tier gold miner like Goldcorp . It's one of the largest pure-play gold miners. Because of its large scale, it has a very low cost of production. However, you're still subject to all the risks I previously mentioned which could tarnish the investment.

Another option is to turn to a more diversified miner like Freeport-McMoRan Copper & Gold . As the name would imply, the company has a large copper operation, in fact it's the second-largest producer of copper in the world. What the name doesn't imply, is that the company has diversified further, this time into oil and gas production. That diversity could really help to alleviate some of the specific operational risks of mining. However, if you want a pure play on pure gold, then you'd probably not care much for diversification.

With that as a back drop, I've found what I think is a better solution to the risks of investing in gold while sticking with a more pure-play investment. The solution is to invest in a gold streaming company, and the one I like most is Sandstorm Gold . It's a lower-risk gold company, as you're still levered to the price of gold and to exploration upside; however, you're not exposed to the risks of capital expenditure overruns. Led by the former CFO of silver streamer Silver Wheaton, the company is taking that proven business model and turning it into golden returns. It's that proven leadership that has caught my eye.

To understand the business of gold streaming, Sandstorm has a great slide in its recent investor presentation that's worth a look:

Source: Sandstorm Gold Investor Presentation

It's this model that makes me think of Sandstorm as more like a venture capital company with a twist. It provides the gold miner with some of the initial funding it needs to get a mine into production. It then has the right to buy gold from the producer at a very low fixed cost. It can then resell that gold at a very high margin and then pocket the difference.

You're still subject to much of the volatility and market sentiment of gold, but that exploration upside provides a longer-term lift to profits. While there are other larger gold streamers, I like the management team and growth prospects at Sandstorm a lot better. It is a small company and it's not without risks, but it is the one gold company that's really caught my eye.

If you want to learn more about the streaming business, then it might be worth it to dig a little deeper into Silver Wheaton. It's a company whose success is determined by the metals market, but without involving itself in the risks of physically mining the metals, which is why Silver Wheaton provides a unique play on the future of silver. SLW chooses to finance the mining of silver; it has grown sales and net income every year since 2008, and also has increased competitive advantages over its limited peer group. To learn more about Silver Wheaton, click here now to access The Motley Fool's premium research report on the company.

The article This Is How I Would Invest In Gold originally appeared on Fool.com.

Motley Fool contributor Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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