Why buying gold shares is not an investment – and what is

Shares in JSE-listed gold producing companies have been on a tear lately, recovering from August's 14 year low to virtually double in the last five months. Yesterday's 5% hop will have delighted the gold bugs. But it should also serve as a timely warning to would-be bullion investors.

The high priest of gold gurus, Nick Goodwin, has repeatedly warned that gold shares are for trading, not investing. Buying gold is the closest anyone with a share trading account will get to going with number four in race six at Turffontein. It's fun. But anyone who claims to be able to predict bullion's direction is delusional.

Actually investing in shares is a very different proposition. When you acquire a slice of a company's equity you're becoming a co-owner of that business. In essence you're taking a view that those running the business will leverage its assets to deliver you a good return. You're actually betting on the power of human ingenuity. Something one can always favour over a punt on the price of an inanimate, volatile object like gold – or any other commodity for that matter.