After the Gold Rush, There Might Be More Upside

Gold has proved itself to be the ultimate contrarian bet against the market over the past three years. So is the gold rush over, or is there still time for individual investors to profit from this trend?

It depends: If you think the economy is reviving and the bull market has returned, you may not think you have much need for gold. However, the verdict is still out on a recovery -- and if we get one, it doesn't automatically mean a return of the bull.

If you believe the economy and the markets are still in for tough sledding, many investors might consider adding some gold to their portfolio. While gold's enormous rally may signal the easy money to be had is gone, some savvy professionals think the gold rally has plenty of life.

"I think we're in the early stages of a bull market for gold," said First Eagle Funds co-president Jean-Marie Eveillard in a recent 10 Questions interview. Several other high-profile pundits cite many reasons for a long run for gold: the weak outlook for major currencies, signs of a slow-growth global economy and the fact that we're coming off two decades of sliding gold prices.

Indeed, gold-oriented mutual funds have returned a cumulative 24.88% on average during the past three years -- far and away the best fund category, according to Lipper, a Reuters company.

Whether you are a bull, a bear or ambivalent, the fact is a small gold stake is a smart hedge in this tricky market. Gold funds have a very low correlation with the broader market -- when the S&P 500 rallies, gold falters, and vice versa. Finding assets that don't always move in tandem is a vital component of a diversified portfolio.

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) 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) 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) 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.

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