Cash has long reigned as king, but a new monarch might reign in the markets next year: gold.

There aren't many places to park your cash for returns these days. Even Treasuries are yielding essentially 0%. However, as the U.S. dollar craters, the one safe haven that could offer some solace is gold. The precious metal traditionally increases in value when the dollar retrenches.

The greenback has continued to decline in value against a slew of foreign currencies. It recently hit a 13-year low against the yen and a 12-week low against the euro. The latest major slide comes on the heels of the Federal Reserve's decision to slash the Fed funds rate to historic lows.

As the dollar has sold off, gold is staging a modest comeback, but it isn't near its highs of earlier this year. As a result, valuations are attractive now. Many investors started 2008 with large positions in gold stocks, which have since sold off dramatically and opened an opportunity for investors who had misplaced their shovels.

Investors can gain exposure to gold through individual gold stocks or exchange-traded funds. Since commodity markets can turn on a dime, the best way to get in is through a gold ETF. Those that track the commodity directly or through gold companies include PowerShares Global Gold & Precious Metals, PowerShares DB Gold, and Market Vectors Gold Miners ETF (NYSE:GDX), which includes AngloGold Ashanti (NYSE:AU) among its holdings.

Grab your shovel and start digging!
Or you could invest in individual stocks that to some degree trade in tandem with the actual commodity. Search for gold stocks that are undervalued and whose underlying businesses show strong proven and probable reserves. Companies such as Yamana Gold (NYSE:AUY) or Freeport-McMoRan Copper & Gold (NYSE:FCX) are bright prospects. Yamana has 17.9 million ounces in proven and probable gold reserves, sports low cash costs, and is targeting production of 2 million gold equivalent ounces by 2012. Freeport-McMoRan, on the other hand, has proven and probable gold reserves of a shiny 41 million ounces.

To dig up strong gold companies, I ran a screen using The Motley Fool's CAPS screening tool, and I also looked manually for companies through CAPS. Here's what I was looking for:

  • Companies that operate in the metals and mining industry. Within the screen results, I specifically looked for gold companies.
  • Companies with CAPS ratings of four or five stars, the two highest ratings from our CAPS community. During the first 20 months for which we have data, four- and five-star companies have outperformed the market, with average annualized gains of 7% and 12%, respectively.
  • Companies with price-to-earnings ratios of 17 or less, because I didn't want any stocks that were too expensive.

Here's what I found from running the screen today:

Company

Market Cap

Current Trailing-12-Month P/E

TTM P/E on Jan. 2, 2008

YTD Performance

CAPS Star Rating (Out of 5)

Barrick Gold (NYSE:ABX)

$28.41 billion

16.06

57.52

(15.5%)

****

Compania de Minas Buenaventura (NYSE:BVN)

$4.70 billion

16.82

33.45

(30.6%)

*****

Freeport-McMoRan

$8.05 billion

2.93

12.22

(78.7%)

*****

Gold Fields (NYSE:GFI)

$5.54 billion

0.59

35.00

(39.7%)

****

Yamana Gold

$4.59 billion

14.93

39.63

(45.9%)

*****

Data from Motley Fool CAPS, Yahoo! Finance, BigCharts.

Remember that the screener's results should be only the first step in your due diligence. Decide your risk tolerance. While some gold companies are already producing and have built up reserves, others are in the early stages of mining for gold and are therefore riskier.

Also keep in mind that currencies and commodities are volatile and move quickly. For example, if other central banks around the world lower interest rates, as the European Central Bank has signaled that it most likely will, the dollar could see an appreciation. That would place downward pressure on gold. As a result, gold stocks, which have a tendency to move in tandem with the commodity, could experience sell-offs as well. That said, gold is volatile and does fluctuate inversely with the dollar. Though there will be fluctuation, I believe the broader trend will be up, during the lackluster economic environment that is expected to continue into 2009.

Start uncovering great companies for your portfolio at Motley Fool CAPS today! Let the collective wisdom of our 125,000 member-strong investment community help you make better investing decisions.

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Fool contributor Jennifer Schonberger owns no shares of any of the companies mentioned in this article. The Motley Fool has a disclosure policy.