Image: Gold © Comstock Images, Jupiterimages

Over the past decade, no investment has shined quite as brightly as gold.

If you had invested $10,000 in gold bullion in January 2001, your 37.81 ounces of the precious metal would have been worth more than $69,000 by Sept 1, 2011. That beat the pants off stock investments. Vanguard Total Stock Market Index (VTSMX), for example, returned an annualized 3.6% over the same period. Bond returns, while better, didn't hold a candle to the nearly sevenfold run-up in the price of gold. And many experts believe the metal's price will go higher.

Yet even many of the most enthusiastic advocates suggest that investors dedicate just a fraction of their long-term portfolios to gold -- if any at all. The reason: Gold is a great hedge against "black swans" -- unexpected and catastrophic financial events. But when times are good, investments in gold typically go bad.

That's because the metal produces no earnings and doesn't offer a dividend yield. It appreciates or depreciates based on supply and demand. Right now, demand is high, thanks to a decade of rotten stock prices, a souring economy and worries about the value of currencies in a world where the list of over-leveraged governments is long and growing. Moreover, interest rates are so low (actually negative in many instances on an inflation-adjusted basis) that the metal's lack of yield doesn't hinder buyers.

Some central banks in developing countries, such as China and South Korea, have also started buying gold, boosting demand. But in normal times, the bulk of demand comes from jewelry manufacturers.

Good times are bad for gold

When world economies are stable and investment returns in stock and bond markets appear attractive, gold simply can't compete, and its price tends to languish. Indeed, during the booming 1980s and 1990s, the metal's price did nothing but fall. "It's a defensive hedge," says David Kudla, the chief investment strategist at Mainstay Capital Management. "People buy gold to hedge against inflation, against deflation, against economic or political uncertainty. We have all of those concerns -- and real concerns about the debasing of currencies worldwide right now."

Kudla expects gold prices to keep climbing until the U.S. government gets serious about cutting the deficit and entitlement programs -- and he has little hope that will happen soon. Still, he says, investors should hold no more than 15% of their assets in gold, and they should buy only when the price dips, because the metal's price is historically high. For example, gold dropped 3%, to $1,818 an ounce, on Sept. 7, a day on which the Dow Jones Industrial Average ($INDU) surged 2.5%

The metal is a good portfolio diversifier, because its price tends to move in the opposite direction of stock prices -- and often against bond prices, too, says the Tony Roth, the head of wealth management strategies at UBS. He predicts that gold will fetch $2,200 an ounce in 12 months and could be worth as much as $2,500 an ounce. And yet he's not a fan. Says Roth: "Gold does not produce income; it has very little commercial value. It really only has psychological value. We don't think that it's going to hold up over the long term." That said, in these uncertain times, Roth thinks that nervous investors might want to hold anywhere from 5% to 20% of their portfolios in gold for "downside protection."

If you're ready to dive in

There are many ways to buy gold. You can pick up coins, bars, gold-mining stocks and exchange-traded funds that hold gold bullion. However, most experts prefer ETFs. The reason: Mining stocks are affected by many factors other than the metal's price, including stock market conditions and the company's management. That can make individual stock prices considerably more volatile than those of the metal itself -- and gold prices are plenty volatile on their own.

However, you can bet on the sector without betting on a single mining company by investing in a mutual fund such as Tocqueville Gold (TGLDX), which invests mostly in gold companies and other precious-metals mining stocks. Over the past year (through Sept. 2), the fund, managed since its 1998 launch by John Hathaway, returned 29.2%, beating the average precious-metals fund by 7 percentage points. Over the past 10 years, the fund returned a stunning 28% annualized, beating its peers by an average of 4.2 points per year.

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Meanwhile, the trading and storage costs for owning bullion as either bars or coins can be significant. Dealer markups and shipping and storage costs can shave the typical investor's return by 10% to 15%.

Exchange-traded funds, on the other hand, can buy in bulk and hold bullion on behalf of investors, so there's no need to pay fees for a safe-deposit box. The two top gold ETFs are SPDR Gold Shares (GLD), which boasts $72 billion in assets and charges 0.40% in annual fees, and iShares Gold Trust (IAU), which holds just over $10 billion in assets but charges annual fees of only 0.25%. I prefer the latter because of its lower expenses.