Contrarians' Day: Gold May Have More Upside

What are the best ways for individuals to invest in gold? Well, here are three options, and the one I recommend for most investors is the last one.

Buy the gold itself. When I was a kid, my sister won an ounce of gold in a radio contest. It was worth a whopping $800 at the time -- and gold's slow, steady decline over the next several years provided me with my first lesson about depreciating assets. Nonetheless, with gold's recent ascendance, some investors might be eager to find direct ways to get their hands directly on the loot. You can buy gold bullions or gold coins, but that can cost an individual tens of thousands of dollars. Unless an individual has a high six- or seven-figure portfolio -- or unless one's market forecast is of the "end of days" variety -- this might not be the best bet. Nonetheless, columnist Jon Markman recently detailed the options for buying the real stuff (he cautions that the gold dealer's cut will set you back), and the World Gold Council's Web site has a How to Buy Gold section.

Buy gold stocks. Investors can try their hand at buying individual gold stocks. South Africa's Gold Fields(GFI Quote) was one of 2002's best performers, soaring 197%. However, investing in specific gold stocks involves a little extra digging, so to speak. Does the company hedge gold prices? Is that promising mine in the Amazon or Canada or Australia panning out? Is the local government threatening to make things difficult? If investors don't have the time to burrow deeply into individual companies, I suggest taking the suggestion below.

Put 5% to 10% of your portfolio in a good gold fund. With a solid fund, such as Eveillard's (SGGDX Quote)First Eagle Gold, you get broader exposure to gold, an expert in the sector and an easy hedge against the broader market with little effort on your end. With its five-year average annual return of a whopping 18.34%, First Eagle Gold is tough to beat. Unfortunately, it charges a 5% upfront load, or sales charge. Investors who buy through a broker can usually avoid the charge. A lower-cost option is the no-load (TGLDX Quote)Tocqueville Gold, which has been around only since 1998. Its three-year average annual return of 33.94% ranks in the top 6% of all precious metals funds, according to Morningstar. But the most compelling reason to buy the fund from a contrarian's perspective is its R-squared value. R-squared values, which range from a low of 0 to a high of 100, measure how much a fund's movements are explained by a benchmark index. Tocqueville Gold's R-squared compared with the S&P 500: 2. If that's not a decent hedge against the broader market, I don't know what is.