Funds with the largest share of gold bullion are First Eagle Gold, Fidelity Select Gold and Tocqueville Gold, with 15%, 4% and 8% respectively in gold bullion.

Morningstar analyst Janet Yang says the reason for the decline in gold bullion holdings is that mining companies stopped hedging their exposure to gold around August. As a result, their stock prices should move much more closely with the price of gold, and on the upside, mining stocks should outperform bullion due to operating leverage.

Joe Foster, portfolio manager of the Van Eck International Gold Fund, says that although he can invest in gold bullion, he holds none. "Gold stocks generally outperform bullion in a rising market," he explains. "Gold is a defensive investment. If I thought the gold market were going to decline, I would go into gold bullion."

How he defensively invests in gold, he says, would depend upon his projected time horizon. He might consider gold bullion for a three-to-five-year time horizon. But if the time horizon were only up to one year, he probably would invest in a gold ETF instead because it's easier to trade.

When Joe Wickwire joined Fidelity in July 2007, he demanded, as a condition of employment, that the gold fund he manages be able to hold gold bullion. Wickwire, portfolio manager of the Fidelity Select Gold and the Fidelity Global Commodity Stock Fund, says, however, that he does not invest in gold exchange-traded funds. Fidelity doesn't want counterparty risk, he says.

From Fidelity's standpoint, the financial crisis of 2008 demonstrated the importance of making sure that you are comfortable with counterparty risk, he says. The most that Fidelity Select Gold has kept in gold bullion is about 10% of assets.

While it's rare for a mutual fund to hold gold bullion, Wickwire views it as a key to his investment strategy. "Having gold bullion gives you a very liquid investment vehicle," he says. While it's very liquid, he says, it has a low relative volatility when compared with gold stocks.

The Select Gold Fund, he says, contains five categories of gold in one portfolio. The other four: larger gold companies, intermediate-size gold companies, junior gold companies and exploration and development companies. "One of the things investors are looking to diversify is U.S. dollar risk," Wickwire explains.

Gold bullion is the only commodity that is also a currency, and it's the only currency that is not someone else's liability, he says. "The people I'm investing for are U.S. dollar-based investors. One of the things my investors are asking me to do is give them an attractive risk-reward exposure to an asset class which has unique performance characteristics. It has the capacity of outperformance when stocks, bonds and U.S. dollars disappoint."

Wickwire says he decides when he wants to hold gold bullion. "I call up the bullion bank and say here's what I want to buy and it's allocated for us and stored for us. It's one of the easiest transactions you can make. There is no counterparty risk. It's an electronic transaction." It's basically the same order entry system as buying and selling stocks, he adds.