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Gold bars.

LISI NIESNER/REUTERS

Michael Bowman is a portfolio manager at Wickham Investment Counsel Inc. in Hamilton, Ont.

What are we looking for?

The gold companies that are producing the largest amount of bullion in relation to their share price.

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This is interesting because of the fundamental choice that faces every gold investor – to buy bullion or to buy shares in a gold miner.

There is a place for both assets, but over the past few years, gold stocks have failed to keep pace with the rising price of bullion. They have moved in tandem with the broad market.

Gold stocks can now offer more potential for gains than physical gold. However, any individual gold stock can lag because of many factors – rising energy and labour costs, political risk or economic turmoil. That's why many investors are showing a preference for gold miners that offer good dividend yields. These companies at least offer some immediate payback for shareholders.

Bullion carries far less risk than the shares of mining companies. Over the long term, it has performed better on a risk-adjusted basis as measured by the Sharpe ratio.

Hence, our screen. We wanted to find gold miners that offered attractive dividend yields, but are also producing large amounts of physical gold in relation to their share price. These companies would seem to be the best positioned to reward investors.

The Screen

My colleague Rob Belanger and I looked at gold stocks to find how many ounces of gold bullion production we would be buying for a $10,000 investment.

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We looked at 22 of Canada's more prominent gold companies and took each firm's 2011 year-end production in ounces, and divided that by the number of shares outstanding.

That gave us the number of ounces of gold bullion that each company produced, per share. We then assumed a $10,000 investment in the stock, which gave us the number of produced bullion ounces that an investor would own for that amount of money. We also looked at any dividend that the company pays.

What did we find?

For a $10,000 investment in Centerra Gold Inc., an investor would be picking up 3.77 ounces of bullion production, and a 2.28 per cent dividend. A $10,000 investment in Canada's largest gold company, Barrick Gold Corp., would buy 2.33 ounces of production, and a 2.45 per cent dividend yield. With Goldcorp Inc., you are receiving less than an ounce of production.

Investors should not base their gold investing solely on this screen, but it is an interesting place to start a more detailed analysis.

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