The U.S. stock market has been taken for a wild ride in 2016, with the worst two-week start in recorded history, the most voracious intra-quarter rally in 83 years during the first quarter to erase double-digit losses in the S&P 500, and a complete reversal from the Brexit-based swoon. On Monday, Aug. 8, the S&P 500 hit an all-time intraday high, with the index itself up nearly 7% year to date.

Precious-metal stocks lead the way

However, if you look around the market you'll spot two groups of stocks that have left the S&P 500 and its 7% year-to-date gains completely in the dust. These two industries are gold miners and silver miners. Of the 23 gold miners with a market valuation of at least $300 million, 18 have at least doubled, 10 have at least tripled, and five have quadrupled in value this year. Within the silver industry, all six miners with a $300 million-plus valuation are up between 137% and 532% year to date.

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These rallies have been fueled by a major reversal in the underlying metals these companies produce. Physical gold began the year at $1,060 an ounce and closed in New York on Monday around $1,335 an ounce. Silver, which began the year at $13.84 an ounce, closed at $19.67 an ounce.

Four reasons to buy gold and silver mining stocks instead of physical metals

Not surprisingly, with precious metals breaking their multi-year downtrend and riding strongly into a new bull market, investors have been eager to buy physical gold and silver. However, in my view, buying physical metals is not the smartest way to go. Instead, I'd strongly suggest that investors wanting to take advantage of a continued rally in precious metals consider buying individual mining stock. Here's why.

1. Growth vs. hedge

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For starters, physical metals and stocks traditionally have different investment purposes. Physical gold and silver are often viewed as an investment hedge, whereas an investor buys stock in a company in order to take advantage of long-term valuation appreciation opportunities.

Although buying physical gold or silver will likely reduce the volatility your investment experiences, your upside potential is also slowed or limited by this perception of physical metals being a hedge. By comparison, if you believe physical metal prices are headed higher, you're liable to see a more substantial impact from the equities that produce these metals. Yes, there is a higher risk of volatility, and potentially of bigger losses, than holding physical metals. But as you've seen from the data above, the gains from individual stock investments can largely outweigh the underlying increase in the precious metals themselves over the long run.

2. A better fundamental understanding

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Secondly, you'll have more to work with, fundamentally, when dealing with individual mining stocks as opposed to physical gold or silver. Don't get me wrong, there are fundamental catalysts that are pushing physical gold and silver prices higher. For instance, increased demand from central banks and investors for gold, and growing demand from the solar industry for silver, have provided a lift for physical metal prices. Likewise, low yields have pushed the opportunity cost of bypassing bonds way down, making precious metals more attractive.

But look at this from another angle. With mining stocks an investor gets immediate access to quarterly financial statements, periodic presentation updates from management, and a bounty of additional data on top of the macroeconomic growth drivers that influence physical gold and silver. Having more to work with fundamentally should allow investors to make a smarter decision.

3. The potential to receive a dividend

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Third, buying individual gold and silver miners can allow investors the opportunity to receive a dividend. One of the biggest knocks against physical gold and silver is that neither pays the holder a dividend. However, if individual companies become profitable enough, and that profit appears sustainable over the long-term, they can choose to return some of those profits to investors in the form of a dividend, or perhaps a share buyback. Nearly half of all gold and silver miners are currently paying a dividend (albeit most are below 1%).

Remember, the advantage of being paid a dividend is that you'll have the opportunity to reinvest your stipend back into more shares of stock. Doing so can lead to more dividend income and more shares of stock. This pattern, known as compounding, is what the top money managers use to build wealth over time.

4. Managerial maneuvering

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Lastly, buying individual stocks allows you to benefit from the movements of management, whereas physical gold has no driving forces beyond macroeconomic factors.

For example, in an environment when metal prices are dropping, the management of a company could choose to rein in spending or cut jobs in order to reduce its expenses and buoy margins. In a rising price environment, as we're in now, this same management team could explore expansion opportunities in mines with high ore grades to boost production and profitability.

Another way management can influence profitability is through mergers and acquisitions. The ability to make deals, or to sell non-core assets, can result in cost savings and improved growth and/or profits.

Mining stocks to consider

Mining stocks are clearly your best path to prosperity if you believe precious metal prices are headed higher. Now let's take a look at few names that could be worth investing consideration.

The obvious, or should I say "usual," suspects are Royal Gold (NASDAQ:RGLD) and Silver Wheaton (NYSE: SLW). Royal Gold and Silver Wheaton aren't traditional mining companies. They don't develop and maintain mines in order to produce gold or silver. Instead, they've each worked with dozens of companies to purchase royalty and stream interests in mines in exchange for upfront capital that allows those mining companies to develop or expand their mine(s). The contracts that Royal Gold and Silver Wheaton sign are often long-term or life-of-mine, and they typically entitle these streaming giants to purchase gold or silver at prices that are well below the current spot value. For instance, Silver Wheaton's average cash costs were only $389 an ounce for gold and $4.14 an ounce for silver in the first quarter. If metal prices are rising, that's an immediate boost in profits for these two royalty and streaming giants.

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Companies that are making moves could also be big beneficiaries. Mind you, I'm a shareholder so there's some clear bias here, but Silver Standard Resources' (NASDAQ: SSRI) acquisition of Claude Resources earlier this year should really help balance out production such that it's not so reliant on silver. Claude's rapid development at Santoy should lead to more than 70,000 ounces of low-cost annual gold production, and its strong cash flow of $20 million-plus per year provides an instant boost for Silver Standard Resources. Furthermore, all-in sustaining costs (AISC) came in substantially below expectations during the first quarter at $859 an ounce, leading many on Wall Street to believe bigger-than-expected profits are around the corner.

Finally, a large gold miner like Barrick Gold (NYSE:GOLD) could be worth a look. Barrick had previously been buried under $13 billion in debt and was forced to write down billions in assets as precious metal prices fell. The new Barrick Gold has been working hard to reduce its debt load, having repaid more than $3 billion in 2015, and on pace to pay back another $2 billion in 2016. Within the next few years Barrick Gold is on track to hit its intermediate target of reducing its debt load to $5 billion or less. Along the way, Barrick Gold managed to reduce its expenditures and expand only its top priority and highest-margin projects. The result is the lowest AISC forecast for 2016 among the largest gold producers, with a midpoint of just $785 an ounce.  

Is it time your portfolio started looking a little more lustrous?