Any notion that the stocks of gold mining companies and the price of gold always move in sync was shattered by a divergence of the two that began in 2010, accelerated in 2011 and continues today. While the price of the SPDR Gold Shares fund (GLD), a popular ETF that tracks gold prices, rose 9.2% for the year ending April 18, Morningstar's equity precious metals mutual funds category, which focuses mainly on the stocks of gold mining companies, sank by an average of 24.8% during the same period.

This isn't the first time gold and gold stocks have parted ways. It happened in 2001, when gold stocks declined after two major mining companies declared bankruptcy, and again between 2005 and 2007, when rising production costs squeezed profits and clobbered mining businesses. Gold prices moved up and away in both of those periods.

For investors, the question now is whether the extraordinarily low valuations of gold mining stocks make them a better bet than investments that aim to follow precious metal prices directly, such as ETFs and bullion.

For Stephen Land, who manages the $2.9 billion Franklin Gold and Precious Metals Fund, the answer is a resounding "yes." "At this point," he says, "the risk-reward profile is more attractive in gold equities than in gold."

Land says shares of mining companies already reflect the expectation that gold prices could fall, making them more reasonably valued than direct gold price plays. What's more, the high price of gold has brought unprecedented profitability to the industry. ETFs, meanwhile, have already seen substantial gains and could face a harder landing if gold prices fall.

The unusual confluence of rising profits and falling stock prices, "have led to valuations that have never been seen in the gold industry before," observes the 37-year-old Land, who became co-manager of the fund in 1999 at the age of 24 and its lead manager two years later. In 2009, the stocks in the FTSE Gold Miners Index traded at more than 30 times earnings, compared with about 13 times today. In an industry where free cash flow was once unheard of, many of the stocks are trading at less than 10 times cash flow.

While low valuations and improved financial health haven't lured investors back into gold mining stocks yet, Land believes that could change. With valuations so low, private equity buyers and other financial players could step in, buy up company stock with low-interest bank loans, and take the companies private. (In fact, analysts have told Land that private equity firms are calling them interested in doing that very thing.) Gold mining companies are also in the position to buy back stocks, something virtually unheard of in the industry, or else initiate or increase dividends.

Land says that unlike the downturns of the past decade, which were driven mainly by negative news related to gold mining companies such as rising costs and bankruptcy, investor concerns about a pullback in gold prices have prompted the most recent slide in the stocks. Although he won't opine about where the price of gold might be headed, he believes a number of trends support a longer-term trend of rising prices. If that happens, the miners could become even more profitable.

"People still view gold as a way to protect against inflation," he says. "Given the amount of stimulus money the U.S. government has been pumping into the economy, inflation is definitely a concern." Adding to this appeal is the increasing demand for the metal from emerging markets, as well as gold's classic appeal as a safe haven in unpredictable economic times.

Whether gold miners' shares will finally pull out of their long slump remains to be seen. But there have been some small glimmers of hope in recent weeks. During the week ending April 12, for example, the Market Vectors Gold Miners exchange-traded fund (GDX) returned 3.6%, while the SPDR Gold Shares ETF (GLD), which tracks the price of the metal directly, returned 2.8%.

Nonetheless, the stocks still face a number of classic risks, including:
Political instability. Upheavals in Africa, where many companies are based or have mining operations, have long been a problem for this group of companies. In March, the price of Randgold Resources, one of Land's holdings, fell by more than 20% after a military coup in Mali raised investor concerns about the effect on production. Although the stock gained back about half its loss a few weeks later when military leaders announced they would hand back control of the country to its previous government, the incident underscored the volatile political climates in which many of these companies operate.

The unpredictable nature of extracting commodity resources from the ground. That point was driven home in February when another one of Land's holdings, Nevsun Resources, plunged on reports that its gold deposits were half of what it anticipated. But Land says the company's large cash position and the value of its zinc and mineral deposits, along with the stock's attractive valuation, outweigh the negative impact of its lower-than-expected gold deposits.