) -- As

gold prices

soar due to the weak dollar and fears of inflation, investors have begun searching for ways to bet on the precious metal even though commodities are esoteric.

While some may be hoarding gold coins, most are looking for investments that move in tandem with the price of gold. Investors should be careful when selecting securities other than those indexed to gold because they may carry extra risks.

Investing in mutual funds to gain exposure to gold is probably the messiest route. Funds such as

Vanguard Precious Metals and Mining

(VGPMX) - Get Report

have surged this year, but they hold shares of companies that engage in a wide range of mining activities. They don't zero in on gold. The Vanguard mutual fund is up more than 70% this year, while gold and the

S&P 500 Index

have gained about 30% and 20%, respectively. In the past three months, as gold has risen an additional 15%, the Vanguard fund has eked out only a 5% gain.

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Mining for gold is a tricky and expensive proposition. A company must buy land, purchase expensive machinery, hire workers and deal with government bureaucracy in the most corrupt areas of the world. Mines are a crapshoot as well.

Mining companies often "hedge away" much of the benefit of higher gold prices with derivatives. Mining operations like

Barrick Gold





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have risen faster than the broader stock market this year, yet when comparing the stocks' historic price trends versus that of gold, it's clear the price of gold isn't the sole driver of the movement.

When regressed against gold prices, Barrick and Goldcorp post adjusted R squared values -- a measure of how well the independent variable (gold) explains the movement in the dependent variable (the shares) -- of only 0.35 and 0.66, respectively, indicating a mild correlation to the price of gold for Goldcorp and a poor correlation for Barrick. (One is a perfect correlation.) External factors affecting the stocks end up making them poor proxies for gold.

Shares of companies that deal in royalties for gold mines may be alluring as well, especially because they sidestep miners' operations risks. Those companies tend to avoid derivatives to hedge their bets, but they still must select mines that will be lucrative. A few duds can quickly destroy profitability.

As a result, companies such as

Royal Gold

(RGLD) - Get Report


Tanzanian Royalty


are even less tied to the price of gold. With adjusted R squared values of only 0.5 and 0.13, respectively, those companies owe little of their share-price movement to the value of gold. In fact, both show a stronger correlation to the S&P 500, making them particularly poor choices for investors who want less exposure to the broader stock market.

So what does that leave? Exchange traded funds indexed to the price of gold are the smartest bet because they forgo the messy externalities that accompany most other assets that are said to offer exposure to gold.

SPDR Gold Trust

(GLD) - Get Report


iShares COMEX Gold Trust

(IAU) - Get Report

are two of the most popular choices.

-- Reported by David MacDougall in Boston.

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Prior to joining Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level III CFA candidate.