Gold is becoming worth its weight.

Mounting concern about U.S. inflation, rising energy prices and a ballooning federal budget deficit have renewed demand for gold. Moreover, buyers in oil-rich countries are recycling profits from "black gold" into the yellow metal. The price of gold futures is at a level not seen in almost 18 years — close to $480 an ounce.

Gold's trajectory raises questions about whether gold belongs in your portfolio and, if so, how much do you invest and where?

Gold is a risky investment, and shares of gold-mining companies can be even more uncertain. Don't forget that the biggest winners in the most famous gold rush ever — California in 1849 — were not the prospectors but the merchants who outfitted them.

With gold, a bigger hoard is not always better. "Don't go overboard," said Andrew Clark, a senior analyst at fund-tracker Lipper Inc. "Gold is not something that you want to have be a large part of your portfolio, because of that volatility."

Yet as a diversification tool, gold is solid. Gold stocks — and the funds that own them — tend to move in opposite directions from both stocks and bonds. Gold miners also are global enterprises, spreading investment risk geographically. Even minimal exposure, say 5% of a portfolio, dampens the impact of unpredictable swings.

Precious and few

With the help of investment-research firm Morningstar Inc.'s (search) database, MarketWatch searched for gold-oriented funds displaying lower risk, lower expenses and higher returns than their category peers.

Franklin Gold and Precious Metals Fund (FKRCX) tops a list of five finalists. Lead manager Steve Land, who runs the $772 million portfolio with Jason Goins, spreads investment risk across 48 mostly large-capitalization stocks.

Higher production costs have tarnished some of gold stocks' luster over the past couple of years, Land said. Competition for miners and geologists, expensive raw materials and diesel fuel and a shortage of tires for mining trucks have pressured margins. Now, Land said, gold's upside breakout partially offsets those spiraling costs — an encouraging development.

"It's at a good price where you generate enough cash for companies to explore and grow their business," Land said, "But it's not so high that you're worried about a huge wave of new supply coming in and flooding the market."

The fund's largest positions as of Aug. 31, the latest report available, include Barrick Gold Corp. (ABX) , a 7.8% portfolio holding, and a 6.9% stake in Newcrest Mining Ltd. (NCM) , an Australia-based producer. Both companies are increasing output and lowering costs, Land noted.

Gold's rise also cheers John Hathaway, manager of Tocqueville Gold Fund (TGLDX) , mostly because investors aren't flocking to his $577 million no-load portfolio even as a bull market for gold bullion takes shape.

"There's very little excitement," Hathaway said. "Whenever you see that sort of apathy, it means this move has to be taken seriously."

Hathaway tends to favor small-cap to midcap stocks, and has a sizeable investment in two main producers: Newmont Mining Corp. (NEM) — the largest gold producer — and South Africa-based Gold Fields Ltd. (GFI)

Newmont is also a top holding of the Oppenheimer Gold & Special Minerals Fund (OPGSX) , while Gold Fields factors prominently in both the Fidelity Select Gold Fund (FSAGX) and AIM Gold & Precious Metals Fund (IGDAX) .

Heavy metal (search)

Some funds, such as the Tocqueville and AIM offerings, also hold physical bullion to diversify their investments in gold mining and exploration firms.

Individuals can also invest in gold directly through two exchange-traded funds — which trade like stocks — that track gold indexes but have no interest in gold-company shares.

StreetTRACKS Gold (GLD) , introduced in November 2004, has a low 0.40% expense ratio and its return closely mirrors changes in the price of gold.

Rival iShares Comex Gold Trust (IAU) , also charges 0.40% for expenses and fluctuates with gold prices, but follows a different commodity index.

Gold fund managers are eyeing the geopolitical landscape closely for events that could trigger a sharp spike in gold. Since these managers typically don't trade much, they favor a more gradual ascent for valuations, and so are attuned to signs of speculation — something that Tocqueville's Hathaway said he isn't seeing.

"This has been a fairly stealth advance that most people either didn't notice or don't care about," Hathaway said of gold's recent move. "That's usually a good thing in terms of longevity."