Investors seek out gold when they are fearful. There's nothing like being able to hold a piece of shiny metal and knowing that if the sky is really falling, you've got something that can at least be traded for life's essentials.

The past couple of years have given investors that panicky feeling. Over the last extremely bumpy decade, the S&P 500 has gained an average of only 2.9% a year annualized. And that means gold and other precious metals are again playing an important role in many investors' portfolios. New York-based Tocqueville Asset Management sees the appeal of this logic. The fund company has been a fan of gold far longer than recent gold bugs have even known where to find the spot price of gold.

In 1998, the firm launched its gold offering, the $2.4 billion Tocqueville Gold fund. It was the height of the dot-com frenzy. At the time, gold was trading at a multiyear low, selling at less than $300 an ounce. The smart money was chasing high-flying tech issues, and there was talk that gold would never again be relevant, given the fabulous returns in equities and housing.

"For a contrarian investor, it was the perfect time to start a gold fund," says John Hathaway, the fund's manager. At the beginning of this year, gold was trading at about $1,600 an ounce.

For the first five years, the fund limped along in an obscure category. But in the early 2000s, investors experienced a vicious turn in the markets, and Tocqueville Gold came into its own.

As the Internet bubble popped and commodities soared, gold didn't seem like a quaint investment of a bygone era. Investors began to see the need to protect themselves from explosions in other parts of their portfolios. Even at today's much higher prices, Hathaway insists investors haven't missed out completely - he believes gold can rise as high as $2,000 an ounce.

CURRENCY IN FLUX

There are several bull arguments for gold, even though there are periods of volatility like December's 10% price drop. The biggest is currency weakness. "Gold is a hedge against currency debasement," Hathaway says. But gold offers a respite from that gloomy worldview. Furthermore, Hathaway notes, three large emerging economies - China, India and Russia - have increased the percentage of gold in their reserves, providing further support for gold prices long term.

These trends have led Tocqueville Gold to impressive gains. Over the last three years, Tocqueville Gold gained an average of 37.6% a year annualized, besting 99% of the funds in Morningstar's equity precious metals category. For the five-year period, Tocqueville Gold is up 14.6% a year annualized, in the category's top 4%. By comparison, the S&P 500 is up 13.4% and 0.1% during those periods, respectively.

Tocqueville Gold is not a pure play on gold. Unlike more common exchange-traded gold funds, this offering doesn't invest just in physical gold, but looks largely to small-cap stocks in mining and exploration. In fact, Hathaway has not bought the real stuff since 2004, and gold makes up just 6% of assets.

The reason Hathaway prefers stocks is that they offer something that gold itself doesn't: the potential to participate in a company's growth and collect a dividend. "As prices rise, they will be forced to bump their dividends," Hathaway says. "With a direct gold investment, you don't get the dividend."

There's also the possibility of stock appreciation, in addition to the increase in gold prices. But such a reliance on gold-related stocks is a double-edged sword: In addition to being influenced by the price of gold, there are times when these stocks act like, well, stocks. Many times, Tocqueville Gold moves more in concert with small-cap stocks rather than gold. In 2011, small-caps as measured by the Russell 2000 fell 4.2%. Tocqueville Gold was down 15.9%. Gold prices, by comparison, rose 10% in 2011.

AROUND THE WORLD

Investing in gold stocks means traveling the globe in search of promising mines and operations. The names that populate the fund's top 10 tend to be based in North America - Canada and Mexico mostly. But further down are more exotic locales. Therefore, analysis of the stocks also requires analysis of the geopolitical situations and the rules of law in the nations where miners operate. For that reason, the fund has shied away from Russia, even though the country is rich in gold mining. "They're crooks," Hathaway insists.

On the opposite end of the spectrum are stocks domiciled in Canada, prized for its stability. "It's the single best jurisdiction with a pro-mining political regime," he says. "But the valuations tend to reflect that."