Does the bull market in gold-mining stocks have legs? Over the past 15 months ending in March, the average gold fund gained 45%. So any financial advisor who kept a small part of his or her client assets in a gold fund served clients well. The S&P 500, by contrast, was down -12% during the same period.

But what about going forward? If past performance is any indication of future results, gold funds should underperform. Despite recent stellar returns, precious-metals funds grew at a -1% annual rate over the 15 years ending in March.

Gold funds soared when bullion prices rose last year due to a poor economy and fears of a weak dollar and future inflation. Fear of war due to the September 11 terrorist attacks also helped gold prices.

Other factors have contributed to rising bullion prices, which hover around the important psychological barrier of $300 per ounce. Overall, the demand for gold as an investment increased 4% last year. The World Gold Council of New York reports that buying by the Japanese alone has tripled over the past year because the Japanese government plans to end guarantees on bank deposits.

Sales of gold by the world's central banks have dropped. Their Washington Agreement, signed in September 1999, caps the sale of gold by central banks to 400 tons until September 2003. There also has been a great deal of consolidation in the industry, and more companies have stopped hedging. When mining companies hedge the price of gold, they borrow gold and sell it to lock into a price for future gold production. They also earn interest on the proceeds. Over the years, this selling of gold has put downward pressure on gold prices.

"Of course the political, economic and market uncertainty of recent months has been a catalyst," says Joe Foster, manager of the Van Eck International Investors Gold Fund, up 68% over the 15 months ending in March. Japanese "gold imports increased 45% in the fourth quarter of 2001."

Gold-mining stocks benefited from the rise in gold prices from $250 an ounce in 2001 to nearly $300 today. The average cost of getting ore out of the ground for long-life mines runs about $200 per ounce, says Mark Johnson, manager of the USAA Precious Metals and Minerals Fund. As a result, every 10% increase in gold bullion prices boosts earnings about 30%. Johnson's fund is up 71% over the 15 months ending in March.

Going forward, however, fund managers and analysts disagree on whether the bull market in gold stocks will continue. Walter Rouleau, editor of Growth Fund Guide in Rapid City, S.D., says his technical analysis shows it will. When valuations between gold bullion and stocks are highly divergent, gold-mining stocks rise, other stock prices fall and the valuation gap narrows between bullion and stocks. That is what has been happening since July 1999. And once Rouleau's buy signal is triggered, it suggests that higher gold prices should have a long run.

Others say today's fundamentals are bullish due to higher bullion prices and higher gold-mining stock prices. "The bias is on the upside," says USAA's Johnson. "There hasn't been much exploration due to low gold prices. But demand should be decent because there is a lot less hedging."

Johnson says he is sticking with large mining companies that have long-life mines and lower production costs. His holdings' average mining cost is about $180 per ounce. His largest holdings include Barrick Gold Corp., Meridian Gold Inc., Goldcorp. Inc., Agnico-Eagle Mines and Co de Minas Buenaventura. The fund has 48% of assets in Canada, 21% in South Africa, 13% in Australia and 7% in Peru.

Charles de Vaulx, co-manager of First Eagle SoGen Gold Fund, also doesn't believe gold prices will move much lower, due to limited production. He says bullion must rise to $350 per ounce before companies increase production. His fund is up 88% over the 15 months ending in March.

"One needs to exceed $350 an ounce to justify the opening of any new mine," de Vaulx says. "If it (gold) trades under $350 over the next five years, gold production will fall significantly. That suggests the odds of the price of gold falling from current levels are low." Interest rates have dropped so much, he says, that it makes no sense to sell forward and invest the proceeds in cash.

Sooner or later, a falling dollar is going to fuel rising gold prices for a couple of reasons, he adds. The United States is running a current account deficit that is 5% of gross domestic product. The consumer savings rate is low. Plus, both consumers and corporations have high debt levels.

"Gold is the only alternative," he says. "The euro and yen are both weak. This leads to gold as an alternative to the dollar."

Currently, de Vaulx favors the large South African mining companies. Concerns about political risk have driven shares lower. So he's buying. Large producers, such as Gold Fields Limited and Harmony Gold, benefit from the rand, South Africa's weak currency. By selling gold in United States dollars and converting them to rands, the cash price of mining ore is just $175 an ounce. In North America, de Vaulx likes Freeport-McMoRan Copper & Gold, which has rich deposits in Indonesia; Newmont Mining, which recently acquired Normandy Mining; and Franco Nevada.

Others top-performing fund managers believe the rally in gold stocks may be over. Bill Martin, manager of the American Century Global Gold Fund, up 76% over the 15 months ending in March, is one.

Contrary to his peers, Martin holds companies that typically hedge the price of gold. Barrick Gold, which hedges to lock in the price of gold for three years, is its largest position, making up 12% of his $194 million portfolio. The company has locked into a healthy profit if gold prices remain at current levels. Its mining cost is just $150 an ounce. Another top holding is Anglogold, a South African company. Martin also holds 15 % in Australian mining companies.

Martin is sticking with the largest producers. He compares his fund with an in-house mining-stock benchmark. Then, he overweights stocks he believes reflect the best relative values. If the dollar weakens and gold bullion breaks the $300 barrier, he says he may move into some secondary stocks with higher production costs.

"We need a weak dollar for bullion prices and mining-stock prices to rise," Martin says. "Gold had a nice run-up to $300 an ounce, but it has not been able to consolidate above that level. Stocks seem quite extended. There has only been a 15% run-up in bullion prices. That doesn't justify today's stock prices. Central banks still are selling gold. Jewelry demand has dried up this year."