Usually, gold is seen as an anti-dollar hedge, but it is rapidly becoming an anti-euro hedge, too. In 2005, the euro fell sharply, yet gold rallied as the dollar rose. In 2008, the same thing happened, and despite a huge sell-off in other commodities, gold still ended up for the year.

At $1,000 per ounce, gold reserves equal about $955 billion, just as the U.S. central bank has embarked on unorthodox quantitative easing that has never been tried before. The Fed's balance sheet has more than doubled to more than $1.9 trillion, which in effect means that the central bank has pushed a trillion dollars into the economy -- actually more, if you count swap lines with other central banks. The European Central Bank is taking similar measures. Is it any wonder that the price of gold is so resilient?

I think that it's highly likely these "liquidity injections" will continue as central banks both here and around the world try to fight this global recession. Yet I don't think this will necessarily result in higher inflation, as long as many people and corporations continue to hoard cash. Furthermore, lending standards are tight, so more liquidity does not necessarily result in more loans. In other words, the velocity of money is declining, even though the supply of money is increasing. The gold price is reacting to the increase of the money supply and the shocks to the global banking system. Gold is beginning to rise in all currencies, not just in dollar terms.

Gold investing 101
The most convenient proxy for gold bullion is the SPDR Gold Trust (NYSE:GLD). Each share gives you exposure equal to roughly one-tenth of an ounce of gold bullion. This is the lowest-volatility precious metals exposure you can get, as it's unleveraged.

If you want more volatility, you can try two exchange-traded notes: the PowerShares DB Gold Double Long ETN (NYSE:DGP) and the PowerShares DB Gold Double Short ETN (NYSE:DZZ). The "double long" and "double short" refer to the fact that each ETN is designed to rise (for the long fund) or fall (for the short fund) twice the daily percentage rise of an index tied to gold prices. Those ETFs can be difficult to use as buy-and-hold vehicles, since gold is notoriously volatile itself. But if you are a short-term trader with a high tolerance for risk, they fit the bill to a T.

Yet if you're looking for even more leverage, gold producers go up even more when gold rallies, and sell off more when it declines. These producers have fixed costs of mining gold they have to cover; therefore, a 10% rise in the gold price creates a much larger percentage increase in miners' bottom lines. In general, the smaller the gold producer, the greater the volatility.

Funds or stocks?
Among mutual funds tied to gold, Tocqueville Gold (TGLDX) has particular expertise in small-cap precious metals producers. The fund offers lower turnover than the category as a whole, at only 16%. While its expense ratio is a fairly substantial 1.43%, that's right around the category average.

If you are looking for broader exposure to the sector, consider the Market Vectors Gold Miners ETF (NYSE:GDX), which holds the leading names in mining. As a rule of thumb, I prefer focusing on large-cap precious metals miners -- generally speaking, they're safer to own, especially if you want to pick individual stocks rather than a fund. The top three are Goldcorp (NYSE:GG), Barrick (NYSE:ABX), and Newmont (NYSE:NEM).

I believe Goldcorp is the best-run candidate of that bunch, and I think it offers the most growth as it ramps up production at Penasquito, one of the largest new mines in the world. Barrick is the value play; it has the largest reserves in the industry, but it has always developed them more slowly, with a focus on profitability. And Newmont is the turnaround story -- it had serious cost issues a couple of years ago, but it's now resolved them as of the latest quarterly report.

Gold miners have lagged the gold price in 2008 -- in a big way -- and I believe they're quite likely to play catch-up in 2009. If you are looking for a long-only hedge against a decline in all paper currencies, not just the dollar, look to gold and gold mining stocks.

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Fool contributor Ivan Martchev does not own shares in any of the companies in this story. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.