Investing: Gold is cheap. Is that good?

Did you know that a billionaire is predicting an economic collapse? No? Did you know that the Federal Reserve is printing so much money that you'll need a million dollars just to buy aquarium gravel? And did you know that gold is the only real form of money?

If you do know all these things, you probably get much of your information from people who sell gold, all of whom will be happy to take your fake U.S. currency in exchange for gold. By and large, gold has been a lousy inflation hedge and, for the last three years at least, a lousy investment.

But gold is cheap right now — or at least, cheaper than it has been — and so are the stocks of the companies that pull the yellow metal out of the ground. For that reason, it's worth looking at both — although if you plan to invest in either, you should be aware that there's plenty of room on the way down as well as up for gold.

People love gold. Gold coins are lovely: A St. Gaudens $20 gold piece is one of the most beautiful coins ever minted. Gold doesn't react easily with most chemicals, making it unusually durable.

And it's rare. All the gold in the world would fill an NFL football field, sideline to sideline and end zone to end zone, to a depth of 5.4 feet. And because it's so dense, it's relatively easy to transport, provided you're not trying to flee with a billion dollars.

Gold has a reputation as an inflation fighter, but the data really doesn't support that. From 1980 through the end of October, consumer prices have gained 209%, while gold has risen 129%.

In fact, gold's performance bears fairly little correlation to inflation. From 1980 through July 1999, the price of gold swooned 50%, to $255 an ounce, while inflation rose 117%. And during the relatively benign period from July 1999 to August 2011, gold soared to nearly $1,895 an ounce.

"Gold does well when Wall Street is anticipating inflation," says Dan Denbow, manager of USAA Precious Metals and Minerals (ticker: USAGX). "But that's virtually impossible to measure and study over time."

Gold does do well, however, when the value of the U.S. dollar falls against other major currencies. Unfortunately — dire warnings from Fed-haters aside — the dollar has risen sharply against the euro and the yen, and this has hammered the price of gold to $1,193.80, a 37% decline from its all-time high.

The arrival of gold exchange-traded funds, which buy and sell the physical metal, may have made things more volatile for gold investors. Gold miners added 3,054 tonnes of gold to supply in 2013, according to the World Gold Council. Gold ETFs added another 880 tonnes for the market to absorb.

The fall in gold, in turn, has pummeled the prices of gold mining stocks, which is the normal way these things work. Gold stocks typically rise and fall far more than the price of the metal itself. Consider a miner that could produce gold for $1,000 an ounce. When gold sells for $1,500 an ounce, the company makes a gross profit of $500. When gold falls to $1,200, someone holding a gold bar has an unrealized loss of 20%. But the company's earnings have fallen from $500 to $200 — a 60% decline.

Gold miners have an additional problem. Like most companies in boom times, they increased production as prices rose. That's not necessarily bad. But they also opened more mines with a higher cost of production, meaning it cost more for them to produce that extra good. As gold prices fell, profit margins fell along with stock prices. The iShares MSCI Gold Miners ETF (RING) plunged 52% in 2013 and has fallen another 21.2% this year, according to Morningstar.

What's the outlook for gold? Chris Mancini, analyst for Gabelli Gold fund (GLDAX), the top-performing gold equity fund this year, looks to the dollar. "It looks way overbought, euro and yen way oversold," he says. Money normally flows to the currency with the highest interest rates, however, and that could keep the dollar strong for a while. Japan and Germany are likely to keep interest rates low, while the U.S. could raise them next year. "How much of that is already priced in is hard to say," Mancini says.

If gold remains reasonably stable, the mining companies have a few good things going for them. Many are shutting down their costlier operations. "All the companies I've been meeting have been talking about reducing costs," Mancini says.

And, says USAA's Denbow, many mining companies will benefit from falling energy prices. "About 25% to 40% of their costs are oil-based costs," he says. "If we get stable gold at, say, $1,300, the industry is very profitable. They have more work to do at 1200, but they're getting there."

The worst-case scenario for any gold-related investment is if the metal continues its fall. It's worthwhile to remember that gold's low was $255 an ounce, and that it has averaged $571 an ounce since 1980. "Even at $1,000 an ounce, it would put a lot of pressure on the industry," Denbow says. "At $800 an ounce, it would be a real reshaping."

If you're optimistic about gold, or simply want insurance against everything in the world going to flinders, the least risky way to play it is through a gold commodity fund, such as the SPDR Gold Trust (SPDR). (You can always buy gold bullion coins from the U.S. mint, although you have to store them somewhere, which is a pain. On the other hand, they're more attractive than a brokerage statement.)

If you're really optimistic, you might consider an equity gold fund: The top performers the past five years are in the chart. Index fans should prefer iShares MSCI Gold Miners ETF.

Bear in mind, however, that being optimistic about gold means being pessimistic about nearly everything else. Those guys who have been touting gold since 1980 have been wrong more often than they are right. The real winners haven't been the ones wailing about the end of the Republic. They're the ones who have invested in its growth. Remember how gold has gained $129% since 1980? During the same period, the Standard and Poor's 500 stock index, with dividends reinvested, has soared 4,787%.