For more than a decade, gold and other precious metals have posted spectacular gains, jumping into the limelight and capturing the attention of mainstream investors. But lately, although gold prices remain relatively high by historical measures, many gold mining stocks are lagging behind -- and some gold miners believe the problem may lie in one of the key investment vehicles that made it so easy to invest in the sector in the first place.

Yesterday, Kirkland Lake Gold CEO Brian Hinchcliffe argued that exchange-traded funds are acting as competitors for investor capital. Pointing to nearly $100 billion in mergers and acquisitions over the past two years in the industry, Hinchcliffe criticized his peers for overpaying on takeover bids, squandering their profits and leading ordinary investors to choose bullion-tracking ETFs instead.

Don't bite the hand that feeds you
At first glance, Hinchcliffe's argument certainly appears to have merit. Bullion ETFs have grown to be a huge force in the industry, with SPDR Gold (NYSE: GLD) controlling more than 41 million ounces of gold and iShares Silver (NYSE: SLV) holding almost 310 million ounces of silver. Even a smaller fund like closed-end Central Fund of Canada (AMEX: CEF) has grown in size in recent years, with almost 1.7 million ounces of gold and 77 million ounces of silver in its portfolio. Clearly, the tens of billions of dollars that investors have plowed into ETFs have drained capital that potentially could have gone into gold mining stocks.

But one response to blaming ETFs for draining capital is that ETFs' heavy demand for bullion has been key in driving metals prices higher, which in turn has contributed greatly to miners' profits over the years. In other words, if you take away the ETFs, gold prices may never have risen in the first place -- leaving miners with even more to complain about.

The dividend debate
As a solution, Hinchcliffe suggested that miners should increase their dividend payouts. Citing a potential 5% to 8% range, he said that dividends are "the best defense against the ETF."

Gold mining isn't the only industry in which investors wonder whether spare cash wouldn't best be returned to shareholders through dividends. Tech stocks with similarly large cash balances have also spurred debates over whether the growth prospects from reinvesting capital into their businesses would actually produce good returns. Skeptics cite similar concerns about overpaying for acquisitions.

With miners, however, there's a clear case for paying dividends to distinguish productive mining activity from a simple play on bullion prices. Because miners produce and sell precious metals, they have incentives to be as efficient as possible in earning profits -- and shareholders can reap big rewards when companies succeed in improving efficiency even if gold prices don't budge. Although profits alone are valuable to investors, the tangible return of a dividend payout carries more weight.

On the other hand, one reason why bullion ETFs have gotten so popular is that many investors don't want to count on company management to make smart decisions. For instance, investors who are interested in palladium essentially have two choices on U.S. exchanges: Stillwater Mining (NYSE: SWC) and North American Palladium (NYSE: PAL). Yet Stillwater took a huge hit last year when it announced it was diversifying its operations by buying a gold and copper mine -- effectively destroying the basis under which many investors bought shares in the first place. Similarly, North American Palladium had to close its primary Lac des Iles palladium mine in late 2008 as palladium prices sank from nearly $600 per ounce earlier in the year to less than $200 during the worst of the financial crisis. The mine stayed closed for nearly a year and a half before prices rose enough to reopen it.

Stay smart
Although gold miners obviously depend on high gold prices, investing in mining stocks is very different from buying bullion, either directly or through bullion ETFs. For miners to shine, they have to demonstrate not only that high gold prices will create profits but also that they'll do everything they can to operate efficiently and maximize profits. If that happens, then mining companies won't have to worry about attracting capital -- investors will flood them with it.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.