YOU CAN'T SPELL GOLDILOCKS

without gold, and don't have to be a bear these days to take a shine to the yellow metal.

The global money supply keeps growing, but consumer inflation has cooled of late. The Federal Reserve is on the sidelines until further notice, and, anyways, has only limited room to raise interest rates given the current state of the housing market and the yield curve.

Meanwhile, crude is back to $58 a barrel, leaving the Saudis with lots of petrodollars to sock away. China's in the same greenback-heavy boat, having kicked off 2007 with another huge monthly trade surplus. And the standoff over Iran's nuclear program doesn't appear especially likely to end well.

Sure enough, gold has reclaimed $675 an ounce, just 6% off the 25-year peak notched in May. In China, they're buying 14-karat hogs to mark the Year of the Golden Pig, an auspicious omen that comes around every 60 years. India seems to be mass-producing gold ETFs.

Here in the U.S., the StreetTracks Gold Shares fund has piled up 461 tons of gold bricks valued at almost $10 billion. This sounds impressive until you realize that this is about the value of a Clorox or a Dover. Never heard of Dover? Exactly. Citigroup metals and mining analyst John Hill calls the gold market in its entirety "vanishingly small."

Though it's growing fast, investment demand for gold continues to run far behind that from jewelers. Roughly three quarters of the (recently slipping) global gold output ends up on our ears, necks and fingers, or else inside safety deposit boxes and mattresses.

I think there's room for gold in everyone's portfolio, so it's pretty frustrating not to have any in mine just now. I hope to do something about that soon. But I thought I'd do some homework to make sure that my next foray into precious metals proves more rewarding then the last one.

Really, though, I can't complain. I bought the wrong proxy too late and sold it too late, but still made money by a happy accident. I remember singing gold's praises in 2003 and worrying that I was getting on the bandwagon too late at $380 an ounce. It took me another year to scrounge up the cash to buy my first stock, enough for a whopping 55 shares of Newmont Mining. At the time, Newmont was seen as an industry leader with the lowest costs and the most leverage to rising gold prices.

It turned out to be none of those things, but by the time I wrote this ode to global liquidity in January 2006, my investment was up 28%. It would top out at 37% at the end of that month. I sold three months later when I realized Newmont wasn't a good proxy for anything except mining hazards. By that time, my 18-month return was down to something like 13%, after commissions. And I was lucky to get that: While the price of gold has increased more than 60% over the last three years, Newmont shares are up 4% over that span, and half of that came in the last two days.

Newmont's troubles with rising costs, pollution claims and compressing multiples turned out to typify the industry's lot. The gold stocks that have done best are those of small-cap exploration outfits with modestly scaled new mines in Latin America and Asia. Meanwhile, the majors have been hurt by rising costs and the discounting of the "magical mystery multiples" traditionally accorded to gold miners.

Judged against the dirt-cheap producers of copper and other base metals, the gold diggers were simply deemed too rich. Now that they're only half as expensive as they once were, Citigroup is pounding the table on behalf of Newmont as well as the new industry leader,

Barrick Gold

Source: Citigroup

He expects cash costs for Newmont and Barrick to peak this year, allowing them to leverage the $700 average gold price he's forecasting into bottom-line gains. In the absence of major expansion opportunities, Barrick could further tilt the odds in its favor by buying back its hefty book of forward hedges, a valuation catalyst it could finance with affordable debt, Hill notes.

An overdue breakout by the big gold-mining stocks would certainly counter worries about the likelihood of increased central-bank gold sales this year. Hill believes the Middle East and Asian buyers will be there to buy every dip. And seeing as most of the recent market drivers for higher gold prices remain in place, it's hard to disagree with that prediction.

Citi recommends a diversified gold portfolio consisting of some GLD, a couple of the large-cap miners and perhaps three smaller ones. But that sounds pretty pricey for a small investor who could get exposure to 40 different gold miners with the purchase of a MarketVectors Gold Miners ETF. Alternately, Barrick looks tempting here, even though Citi deems Newmont the more undervalued company. It's best not to relive old love affairs. I'm more attracted to Barrick's superior management and lower political-risk profile.

Of course, I don't have the cash to drop down the shaft just yet that will have to come from the springtime tax refund. Fortunately, spring represents the gold market's annual ebb. So I'll be lined up there with the oil sheiks and the Chinese bankers, waiting for a dip to buy.

By Hill's reckoning, that's a step up from the "canned food and crossbows crowd" gold used to attract. The metal remains a good hedge against a crisis, financial or otherwise. But now its outlook looks bright even if the world doesn't go to hell. "The economy's growing great, the Dow's at a record, interest rates are low, the dollar's strong and gold's doing great," says Hill. "And that's a good thing. It's healthy for the asset that you don't have to be some gloom-and-doomer wacko to like it."

And speaking of survivalists, last week I offered the 5 1/2 tips for coping with a market correction, starting with the advice to make hay now. Of course, I went and scared myself into paring my equity exposure to 75% on Monday, with the remainder moved from a growth fund into cash. I'm not turning bearish, just trying to stay prudent. We're likely not done with worries about trends in housing and manufacturing, nor with nerves over the ongoing slowdown in earnings.

I held that domestic growth fund in my 401(k) account for exactly four months, and made a bit over 6% over that span. And now I'm willing to get paid the annual 5% cash rate while waiting for a better opportunity to buy. I know this isn't exactly what John Bogle had in mind. Too bad. I'm a little too old to sell on buy-and-hold.