December 12 2007: 9:18 AM EST
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Safe ways to invest in gold

The precious metal has been soaring on the back of a weak dollar and low interest rates. Is 2008 the year it finally falls?

By Katie Benner, writer-reporter


(Fortune) -- How long can gold's winning streak continue? The quintessential precious metal has been gilding portfolios with seven straight years of strong gains.

Gold futures leaped by 26% in 2007 and reached a 27-year high of $845.84 before slipping just below $800. (This year's peak was still dramatically below the 1980 inflation-adjusted apex of $2,000, notes's James Turk.) Most strategists and money managers argue that gold will continue to shine.

The case is simple: The same factors- the anemic dollar and low interest rates- that aided gold's rise show every sign of continuing. The dollar will struggle for at least another six months, says Greg Anderson, director of foreign-exchange strategy at ABN Amro, and will remain soft until the United States tackles its budget and trade deficits. (We'll leave it to you to predict the likelihood of Congress solving those epic challenges in an election year.)

Meanwhile, if the Federal Reserve keeps interest rates low, as is widely expected, non-interest-generating assets like gold become more attractive, especially with inflation edging higher.

Still, after years of gains, fears of a gold correction are increasing. "Risk has returned to the market," says Axel Merk, manager of the Merk Hard Currency fund. "We are in the midst of a global credit contraction, and that means people will pull money out of all asset classes, even gold."

For now, a modest position in gold seems sensible. One exchange-traded fund that we've recommended in the past, streetTracks Gold Shares (Charts) , offers a smart way for retail investors to add the glamorous commodity. The fund, which gained 24% over the past year, is one of the few pure plays: It actually holds bullion in trust. We suggest avoiding mining companies because of their speculative risk.

A safer alternative is a mutual fund such as Franklin's Gold and Precious Metals fund (Charts), which provides a basket of mining stocks. The fund, which has a reasonable 0.9% expense ratio, has averaged a total return of 29.9% over the past five years, according to Lipper. That suggests it can still burnish your portfolio in 2008. To top of page