Despite all the hoopla, I think gold had a pretty disappointing run in 2008.

Even as panicking hoards of investors rushed to the sidelines to weather the mayhem, gold spent the last nine months of 2008 mired in a deep and prolonged correction within the multi-year bull market for precious metals. After surging above $1,000 per ounce back in March, gold touched briefly below $700 in October, while the U.S. dollar enjoyed a surprise rally.

Silver tested the mettle of investors, dropping nearly 58% from peak to trough in 2008. Both silver and gold miners found themselves shivering in the doghouse, with quality producers like Yamana Gold (NYSE:AUY) and Silver Wheaton (NYSE:SLW) shedding 80% or more from their respective 2008 highs to their lows.

A relative windfall
After six months of torture for investors, however, the tide has clearly shifted dramatically toward recovery. Yamana shares have surged more than 130% from their October low, while larger rival Kinross Gold (NYSE:KGC) gained an impressive 165%. My favorite stock for 2009, Agnico-Eagle Mines (NYSE:AEM), enters 2009 scorching on the heels of a 140% rocket ride.

Gold outperformed every single major equity index in the world in 2008. Poised to close out the year with a gain of less than 2%, the oft-maligned metal quietly retained its value even as hot-shot hedge fund managers lost billions for their clients.

While the ongoing financial tsunami will continue to affect every economy on the globe, Fools are reminded that the U.S. remains the epicenter of the quake that started it all. With the current fiscal policy of free money, and outlays reaching into the trillions of dollars, the balance sheet of the United States has been compromised to an historic degree. Unfortunately, I believe the reserve currency of the world faces a difficult road ahead.

Sources like Peter Schiff and Citigroup have suggested that gold may reach $2,000 per ounce in 2009. Legendary investor Jim Rogers recently declared his intention to exit all dollar holdings. Personally, while I also see gold reaching $2,000 at some point during this historic run, I am not convinced it will come quite that quickly. The ratio of gold to silver prices stands near 80-to-1, suggesting silver may also have a nice recovery in store as it trends back toward an historical average ratio of about 20-to-1.

Last year, Goldman Sachs recommended shorting gold as one of its top 10 tips for 2008, so the bank's forecast for $795 gold in 2009 leaves me thoroughly unconvinced. Perhaps the enormous range of 2009 price forecasts -- between UBS' $700 and Citigroup's $2,000 -- offers a clue to the kind of volatility that may yet lie ahead. Either way, I'll sure take the flip side of fellow Fool Rick Munarriz's bet that shares of Google (NYSE:GOOG) will outperform gold in 2009.

Finding precious returns
I believe that carefully selected gold and silver bullion proxies like Central Fund of Canada (AMEX:CEF) form a critical foundation for any foray into precious metals. Mining companies offer leverage to bullion price movements, but that leverage pendulum cuts both ways.

Mining is a capital-intensive industry, so a constrained global credit market is forcing many companies to scale back exploration and development activity in attempts to shore up balance sheets. Combined with a nasty dip in base metal prices, which are generally key to keeping gold and silver mining costs within economical ranges, these challenges create something of a minefield. Despite my bullish outlook for the precious metals themselves, I still see the outright failure of some mining companies as a distinct possibility, and I suspect some uninspiring fourth-quarter earnings results could challenge shares in the near term. For the quality miners, though, I believe that substantial upside leverage to higher gold and silver prices awaits.

My Foolish criteria for selecting quality miners include:

  • A close examination of the balance sheet. Reasonable debt ratios may be acceptable in cases where production growth is a given, but otherwise a debt-free miner like Goldcorp (NYSE:GG) looks enticing.
  • Critical mass. Some junior miners may ultimately enjoy the greatest leverage of all, but their smaller scale often reduces flexibility in adapting to challenging conditions. Tread carefully for now!
  • Operations in geo-politically stable regions. Agnico-Eagle takes the cake.
  • Low-cost of production. Yawanna check out Yamana for gold, and Silver Wheaton for silver. The quality of ore grades are a factor as well.

Until the fundamental outlook for the U.S. dollar reverses course, I maintain that gold and silver investments offer the best safe-haven characteristics available anywhere. If a 2% gain for gold outperformed the equity markets in 2008, imagine what a truly precious bounce in 2009 could achieve.

Further Foolishness:

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.