By Shelly K. Schwartz, special to CNBC.com
NEW YORK ( CNBC) -- There are a lot of reasons to invest in gold, but to ride the extraordinary, multi-year rally underway you don't need to go out and buy some coins or bullion and put it in your bank's safe deposit box. Gold's low correlation with other asset classes, like stocks and bonds and even other commodities, for example, can help minimize volatility in an otherwise equity-heavy portfolio. "We are still arguing that people should add gold to their portfolios as part of a diversification strategy," says Katherine Klingensmith, a strategist for UBS Wealth Management Research. "There's still quite a bit of concern about the structural integrity of the financial markets, so there are still plenty of folks looking for hedges against continued weakness in the global growth story."
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Most gold mutual funds, for example, are equity-based, investing primarily in companies engaged in the mining, production, processing and distribution of gold. Thus, they track a stock index like the Dow Jones Platinum & Precious Metals Index, not the price of gold. Due to increased labor and energy costs, however, such funds have generally fared worse in recent years than their counterparts that invest directly in gold bullion - the commodity itself. To wit, the FTSE Gold Mines Index, which tracks the performance of all major gold mining companies worldwide, is down more than 6% for the first seven months of the year, despite the runup in spot gold prices. Gold equity-based mutual funds that diversified into physical gold or other precious metals, however, have outperformed relative to their peers.