As of Feb. 26, the price of gold was approximately $940 per ounce, and demand for this precious metal is on the rise. On Friday, we looked at gold scams and how to avoid them. Now we’ll turn to investing in gold.

I’m going to say the same thing today that I said on Mad Money last Wednesday night: It’s all about gold and why you should be a player, even though gold is going to get spanked in the short term.

It might seem nonsensical, but stay with me. There really is gold at the end of the rainbow here, you just have to know where to look, and how to get it.

As I said on Mad Money, gold has made a huge move since the beginning of 2009, after crushing stocks in 2008 (a 5% gain for gold versus a 30% decline in the Dow Jones Industrial Average). Actually, gold reached as high as $1,000 per ounce, before bouncing back.

Gold will keep dropping, I expect, maybe down to $900 per ounce. Right now it’s just too overbought, and too over-owned. Too over-everything, actually.

So why am I out there on national television recommending gold? A fair question—and here’s a fair answer.

You need gold in your portfolio. When gold prices fall, they usually fall fast, and they bounce back sharply, so it’s a difficult investment to get back into. I want you in now so you can benefit from that bounceback from $900 (or even lower, if the price of gold overshoots my mark).

The hard metal’s performance is impressive. Back in November 2005, the price of an ounce of gold and the price of one share of Google (Stock Quote: GOOG) were about the same, at $700 (per ounce for the gold). Today, the price of one share of Google stock is $340. As I said before, the price of gold is about $940 an ounce (and remember, it was recently above $1,000).

Gold is also a great hedge against a sour economy. Since I’m skeptical about Washington’s plan (if you can call it that) to fix the financial and housing sectors, gold is our best hedge against various bailout bills and stimulus plans, all of which invariably lead down a path to higher inflation.

I’m going to tell you how to invest in gold, but before I do that, I’m recommending that gold only comprise 15% of your investment portfolio. I also want you to wade in gradually, so you’re buying as prices decline. It’s chaotic out there right now in the economy and in the financial markets. So let’s cap our gold portfolio, take a gradual approach, and learn the ropes first.

There are several ways to invest in gold and I’ll cover the best ones. But I will say that for average investors, buying gold through stocks and exchange-traded funds is probably the best way to go (more on that in a moment).

Here are three ways to invest in gold:

1. Bullion. Gold bullion means buying gold as a pure hunk of metal. Usually that’s done by buying gold in the form of bars and coins, and usually by weight in ounces, grams or even kilograms. I sold a lot of gold bullion while I was at Goldman Sachs (Stock Quote: GS), where I would send my customer’s gold directly to a depository bank—a piece of cake for my clients. That said, I’d only recommend gold bullion for larger investors who can afford to buy in bulk.

If you opt to buy gold coins (which I don’t mind at all), make sure you buy from a reputable dealer and make sure you get a letter of certificate. A storage safe is a good idea, too. Popular gold coins include the American Gold Eagle and the South African Krugerand. Get gold coins directly from the U.S. Mint or a variety of other sources.

2. Exchange-Traded Gold Funds. Buying gold through ETFs is pretty easy—they’re like mutual funds masquerading as a stock. ETFs trade like a stock on the New York Stock Exchange, with prices changing all the time. By and large gold ETFs trade at about one tenth the price of an ounce of gold, so they’re more affordable, too. A bonus: With gold ETFs, you don’t have to pay for storage or insurance, so you save even more money.

One fly in the ointment: I don’t like the tax rules on ETFs. Capital gains taxes are higher for ETFs than they are for regular stocks (the IRS considers gold a “collectible” and not a stock, so the capital gains bite is a big one). One way around that is to stash your gold ETF in a Roth IRA, which is tax free. One ETF I really like is SPDR Gold Shares (Stock Quote: GLD). It’s a good fund, but, as I said earlier, I’d get into it gradually. For example, buy it this quarter at $91 (where it’s roughly trading now), then next quarter buy again at $88; the next quarter at $85, and so on. That’s a good game plan. It protects you from too much risk but ensures that you’ll be in there for the rebound.

3. Gold Stocks. Gold is also bought and sold on global stock markets, in the form of individual stocks. Gold stocks, especially gold-mining stocks, tend to be volatile and they’re not easy to research, because of the complicated issues related to getting various grades of gold out of the ground. When you buy gold stocks, make sure you know what you’re buying. As I said, some mine gold specifically, but others mine gold along with other commodities like silver or zinc. Often, gold stocks aren’t as reliable as gold bullion or coins, but everyone keeps asking me about them, so I know there is a lot of interest out there.

My take on gold stocks? Well, gold stocks aren’t like other stocks, and again, should be bought in stages like the ETF example I gave above. As I said on Mad Money, we typically like stocks that have low price to earnings multiples, have good dividends, or are relatively cheap compared to other stocks. But gold has none of those attributes. So how do we rank them? We use key metrics, like production growth, cash costs, the sensitivity of a company’s earnings to changes in gold prices and its price to net asset value (akin to the price-to-earnings ratio for gold stocks). One gold stock I like right now is Agnico-Eagle Mines (Stock Quote: AEM); another is El Dorado (Stock Quote: EGO). Both are good, stable picks that meet the metrics I mentioned above. (And besides, in the case of El Dorado, how could a guy like me pass up a stock with the symbol “EGO?”)

Bottom line: Agnico-Eagle Mines, with its tremendous production growth, is still one of my favorite gold stocks. But based on all of our metrics, it’s become clear that El Dorado is the best of the gold stocks—the one you want to buy in stages as gold works its way down to $900 an ounce.

Whatever you decide to do, make sure you do your gold homework. Here's one good resource.

Brian O’Connell contributed to this article.