Gold prices are tumbling and U.S. inflation is only a hair over 1% but the gold market has been melting into a slump. And yet, despite this, some people would still recommend investing in gold because they think it might be worth something when the dollar collapses.

That’s all well and good but there are many other reasons to invest in gold such as it being an excellent hedge against currency risk and inflation, as well as being a great way to diversify your portfolio with commodities that have less volatility than stocks or bonds.

The gold mining industry is an interesting one because it is relatively small and fragmented, with about 80 companies responsible for about 70% of all the gold mined in the world. But these companies are also some of the biggest players in the gold market, with major companies such as Barrick Gold (NYSE:ABX), Newmont Mining (NYSE:NEM), and Kinross Gold (NYSE:KGC) generally being able to weather economic storm better than most other assets.

Most of the companies we will be looking at today are not actually involved in the mining of gold, but rather the production, refining and distribution of it. The key thing here is to make sure that you’re buying a company that has a reasonable amount of exposure towards the sector as a whole because this can help to hedge against volatility in gold prices.

Beverly Hills Precious Metals is a great company in itself. There is a Beverly Hills Precious Metals review that you should see before making any final decisions.

The following list includes five mid-cap gold stocks that should be considered when investing in gold stocks. All five have solid balance sheets and are not over-exposed to the sector as a whole so they should fare very well in market conditions like these.

1. Franco-Nevada Mining Corporation (NYSE:FNV) is a royalty and streaming company that provides investors with exposure to the gold mining industry across the world. The company has excellent top-line growth and, in addition, has diversified its earnings base nicely to reduce volatility. Most importantly however it also owns a substantial number of shares in Barrick Gold (NYSE:ABX), the largest publicly listed gold company by market capitalization, which should help it to ride out any downward trends in gold prices.

2. New Gold, Inc. (Nasdaq:NGD) is a royalty and streaming company that has a large exposure to Canada where it is based. The company has had some very impressive growth over the past three years and has plenty of room for further improvement. In addition, most of the company’s reserves lie in jurisdictions such as Ontario and British Columbia where gold prices are expected to continue rising in the coming years.

3. Panther Gold Corporation (NYSE:PGN) is a junior gold mining company that focuses on its exploration efforts in Latin America while also producing precious metals from its mines as an add-on activity. The company has a very low debt-to-equity ratio and a decent cash flow generation ability so a good dividend yield should help to boost shareholder value.

4. American Silver Eagle Mining Inc (NASDAQ:ASK) is a mining company that produces silver, gold and platinum group metals from its Arizona operations. Although the company has generally been overshadowed by its peers owing to being public it still manages to trade at an attractive valuation so investors should consider purchasing shares at these levels.

5. Zafiro Resources Ltd (ZAF) is an exploration company that looks to develop mineral resources in Canada, Chile and Argentina. The company has very low debt, which is helpful in a situation in which funding gold exploration projects is difficult because of tightening credit markets. As a result of that, the company should be able to continue growing at a healthy pace.

At the end of February 2010 gold and silver prices hit the lowest levels since 1987. This was all the more surprising given that house prices were rising, consumer spending was robust and there had been a general expectation that economic growth in China would increase. In other words, it seemed as if everyone should be buying assets in gold. But not everyone was doing so. The simple answer to why gold failed to perform is that people did not believe that deflation could occur – or even that it could happen at all.

For most of 2008, gold and silver prices were at their highest levels in history. Many people ignored the signs suggesting that a severe economic downturn was coming, instead of buying gold they assumed that growth would resume on a sustainable path and that the U.S. Federal Reserve would continue to print large quantities of money to keep things going.

During the last three months of 2008, gold fell by almost 40% as the financial system began to unravel in earnest. It is not terribly surprising therefore to see how gold prices have fallen since then. The chart above shows how gold prices fell steeply during 2009 and only managed to return back to the levels last seen in 2004 by the end of January 2010 (the chart is from Yahoo Finance).

As you can see investing in gold can be an effective way to protect yourself against financial and currency crises, as well as inflation. Also, this is one way to help diversify your portfolio by adding precious metals and commodities with lower volatility than stocks or bonds. Of course, it’s important to do your own due diligence before making any investment decisions so be sure to check the fundamentals first and never solely rely on this list when making your investment decisions.