(MONEY Magazine) – If all the gold that has been taken from the earth in all of recorded history could be molded into one cube, it would measure only 18 yards to a side -- small enough to fit in a modest suburban backyard with room left over for a patio. The scarcity of this metal is what makes it precious, but few commodities are as unstable in value. Witness the price of gold during the first half of 1987. It shot up 19% from Jan. 1 to May 20, going from $403 to $480 a troy ounce, sank to $437 in the next four weeks, then rose again to $450. Where it will head next, nobody knows. The price of gold may be unpredictable, but the reason for its volatility is obvious: fear of inflation. Gold serves as a storehouse of value when the purchasing power of money is in steep decline. Investors swap their cash for it at such times, driving the price skyward. This is particularly so, says Eugene Sherman, chief economist at the Federal Home Loan Bank of New York, just before abrupt surges in the consumer price index -- most notably in 1980, ) when gold more than doubled as the CPI was heading toward a record 12.2% annual rise. So that you will own some inflation insurance when living costs take off, most analysts and professional money managers recommend putting at least 5% and at most 10% of your invested assets in gold. And even though gold investments yield little or no income, people nearing retirement should lean toward the higher figure, especially if much of their savings is in fixed- income securities such as bonds and thus greatly exposed to the risk of lost purchasing power. The problem is where and when to buy gold and in what form. Should you buy it from your banker or broker or from a retail coin dealer? Should you invest with someone who sells it over the phone -- a thieves' market these days? Should you invest now or wait for a drop in price? Should you buy gold bars, gold coins recently issued by the U.S. Treasury and several foreign governments, rare coins with extra value as collectibles, the shares of gold- mining companies, or the mutual funds that specialize in those shares? And if you choose the metal itself, should you take it home with you or let the seller arrange to have it stored? Investors who try to time their gold buying in anticipation of inflation are risking trouble. ''It's too easy to run in at the top and rush out at the bottom, which is what most investors end up doing,'' says John van Eck, manager of a brace of gold mutual funds, Gold Resources and International Investors. Besides, not even the experts can agree on where gold is headed. If, for example, you heed the views of veteran gold watcher Albert Friedberg, head of Friedberg Mercantile Group, a Toronto commodities firm, you will buy gold now. Friedberg predicts that the price will resume its rise soon and surpass its record high of $875 within two years. But if your guru is William Siedenburg, top-rated metals analyst at the brokerage firm of Smith Barney, you will squelch the urge to buy for a year or so. Siedenburg forecasts the price will sink to $400 in the next six or seven months and not rise above $420 until at least mid-1988. Faced with such conflicting predictions -- not to mention the potential damage of wide price swings -- small investors should reduce their risks by buying gold systematically over a fairly long period, advises Jeffrey Nichols, president of American Precious Metals in New York City and author of The Complete Book of Gold Investing (Dow Jones-Irwin, $30). You can do that & through accumulation plans offered by banks and brokers. They permit you to buy a set dollar amount of gold at regular intervals, as little as $50 every month or quarter; that way you acquire more bullion when the price is low than when it is high. Whichever way you buy gold, deal only with a seller you know and trust. Mark Twain described a gold mine as a hole in the ground with a liar standing next to it. Today's liars don't stand; they sit at telephones in establishments called bucket shops or boiler rooms, many of them in California and Florida, flogging golden opportunities. State regulatory officials estimate that these operations, using pressure-tested sales recipes, fraudulently extract $500 million a year from investors. The California Department of Corporations gets 50 to 100 complaints a week from boiler-room victims. ''And they all lose all the money they put in,'' says William McDonald, the agency's head of enforcement. You can go wrong even in the legitimate markets unless you go armored against all forms of unholy grail. Pass up invitations to dabble in an arena where even trained mercenaries perish -- gold futures or options. They make it possible to speculate on large amounts of gold for a fraction of its price but expose you to the loss of all your money -- and with futures, more than you put up. Consider instead the offerings described below and in the box on page 48.

BARS AND COINS You can buy bullion in bars of 24-karat gold and in 22-to-24-karat coins minted by governments. Bars are available in sizes of one gram and up, but there's an advantage to buying bars of 10 ounces or one kilogram -- if you can afford them. They generally carry a lower premium for manufacturing costs than that charged for smaller bars -- usually $5 for a one-ounce wafer. Unless you want to turn your house into a miniature Fort Knox, you can buy gold bars without having to take them home. Dealers will arrange storage for you in special bank depositories at annual fees of about 1% of the gold's value. If a dealer is arranging storage for you, however, be sure the depository is a major bank. In the past, charlatans have stashed away gold- painted bars -- or nothing at all. Cautions Fowler West, assistant director of the Commodities Futures Trading Commission, federal regulator of commodities and futures trading: ''I'd be very concerned about a company that volunteered to store the metal for you in its own vault as part of its sales pitch.'' Regulators suggest calling the depository -- before you send money -- to verify that your dealer has an account there and that customers' assets are kept segregated from those of the firm. That way, the dealer's creditors won't have a claim on your gold in case the firm goes bankrupt. Also verify with the dealer's insurance company that your gold in storage is covered for theft and fire damage. Coins are more convenient than bars if you want to take possession of your gold; they are easy to sell and fit in a safe-deposit box. Although banks don't insure the contents of their vaults, you can cover your coins for a fee of $1.50 to $2.75 a year per $100 worth with a rider on your homeowners or tenants policy. Coins such as the Canadian Maple Leaf and the American Eagle are favored by many investors for their easy marketability throughout the world -- of more than theoretical importance to people who fear that someday they may have to flee war or civil violence. As with smaller bars, however, you have to pay a premium to cover the costs of making coins. Brokers' commissions for coins run between 2% and 8% of the total transaction vs. up to 15% on the smallest bars. Gold coins of numismatic value are another alternative. Collectors price such coins according to their rarity, condition and artistic value, and the prices are apt to be far higher than the worth of a coin's gold content. As with collectibles of all kinds, it takes special knowledge and a fascination with the objects if you hope to become a successful investor in numismatic coins. Furthermore, says Louis Vigdor, senior vice president of Manfra Tordella & Brookes, a coin dealer in New York City and Miami, numismatic coins are less liquid than bullion. Prices reported in catalogues may be hard to duplicate unless you have plenty of time to wait for a dealer to find you a buyer. The least expensive way to invest in gold bullion is through certificate programs offered by many banks and brokerage firms and by Deak International, a precious-metals dealer with offices in 28 cities. The certificates, which you can usually buy for the price of an ounce of gold, give you title to a portion of a large amount of the metal that has been bought, stored and insured at bulk rates. In some programs you can request delivery of your gold at any time; in others you can't. In either case, you can liquidate your position through your dealer whenever you choose.

DOS AND DON'TS -- Do select a dealer carefully. Stick with firms that can document that they have been trading in gold for at least five years. ''A dealer would have to have been in business that long to prove he can weather significant bear and bull markets,'' says Bruce Kaplan, chairman of the Industry Council for Tangible Assets, the largest metals-industry trade association. A legitimate dealer will always buy back the gold he has sold you. This saves you the cost of having gold bars assayed to prove their metal content -- a requirement any other dealer would be likely to demand before buying your gold. Questions to ask the dealer: Who audits the firm, and is the audit conducted at least once a year? (Then call the auditor and verify that the dealer is a client.) Does the dealer belong to the local Better Business Bureau? (Check that out with the BBB in his city.) Kaplan's group blacklists firms that don't live up to its code of ethics and responds to investor complaints about dealers. To find out about a dealer's reputation, call the council (201-783-3500). -- Do shop for the best price. With dealer markups ranging from 2% to 15%, you may save plenty. If you are in one of 45 states that slap a sales tax on gold, the dealer can save you money by having your gold stored in a state with no tax. -- Don't fall for deals that involve buying gold with bank loans. Telephone salespeople may pitch you aggressively to put down, say, $3,000 on a $10,000 purchase of bullion and borrow the rest from a bank, which will keep the gold as collateral. The hype is that if gold rises a mere 15%, giving you a $1,500 profit on your $3,000, your gain is 50%. Maybe so, but even if the deal is legitimate, that rosy result doesn't take account of dealer commissions of 4% or more, storage or transaction fees as high as 2.5% or interest at 8.5% and up. And if the value of your gold drops to $7,000, the bank will demand additional collateral.

STOCKS AND MUTUAL FUNDS The only way to get income from gold holdings is to buy shares in gold- mining companies that pay dividends. When the price of gold goes up, dividends generally rise as well; when gold falls, so does your payout. Most publicly traded mining companies are in North America, Australia and South Africa. Many Canadian companies are listed on U.S. stock exchanges, while shares of Australian and South African mines are available in the form of American Depositary Receipts, also traded on U.S. exchanges and representing mining shares held in U.S. banks. South African mines used to be popular investments because they pay out most of their earnings in dividends whereas North American companies pay 1% or less and plow the rest of their earnings back into production. But racial unrest in South Africa poses risks to investors. The mines depend on the labor of black workers, and repeated work stoppages would make them unprofitable. A risk shared by gold-mine investors everywhere is the exaggerated ups and downs of mining shares, illustrated in our chart on page 51. Here's why: With mining costs pretty well fixed, changes in the bullion price go straight to the bottom line, boosting or slashing profits exponentially. If your timing is poor, you can get whipsawed furiously, buying at top price and selling in panic near the bottom. And at a current average price/earnings ratio of 40 -- more than twice that of U.S. stocks in general -- many analysts consider gold companies to be dangerously overpriced. Mutual funds specializing in gold-mine companies at least let you diversify within the industry. The best performers in the 12 months to July 1 were USAA Gold (no load; 800-531-8000), up 127%, and Van Eck Gold Resources (7.5% load; 800-221-2220), up 126%. Both hold a mix of South African, Australian and North American mines. The best-performing fund with no South African shares is United Services New Prospector (no load; 800-824-4653), up 117%.

DOS AND DON'TS -- Do stick with mining companies that have at least $300 million worth of shares in public hands. The stock will then trade heavily enough to make it easy to unload. ''The gold index is volatile enough,'' says Lucille Palermo, a gold-stock analyst at Drexel Burnham Lambert. ''You don't want to compound that by being in stocks you can't get out of if the price of gold turns down.'' You can get publicly held share values from your broker. -- Don't dabble in penny mining stocks. Exploration companies, which raise working capital by issuing shares that cost less than a dollar, are cheaper than producing companies. ''But 90% of them don't pan out,'' says James Blanchard, president of the precious-metals firm James U. Blanchard in New Orleans. -- Don't invest in individual mining shares unless you are prepared to diversify. Daniel Rie, manager of Colonial Advanced Strategies Gold Trust, recommends holding 15 stocks representing mines in more than one country. -- Do choose a mutual fund if you are unable to keep a close eye on your investments. Especially in gold mining, opportunities change quickly; you need portfolio managers with a global view who can make timely switches. -- Do wait for prices to drop. Like mining stocks, gold-oriented mutual funds are at lofty levels right now.

BOX: The Midas market Which type of gold investment is best for you? To help you answer that question according to your motives for owning the metal, this rundown of the options sorts out the differences in terms of suitability, cost and risk.

GOLD BARS For whom: conservative investors prepared to hold large amounts of the metal for years; people who want insurance against political upheavals Where to buy: large banks, coin dealers, stockbrokers Smallest investment: tiny bars weighing one gram (0.032 of an ounce) and, at the recent gold price of $450 a troy ounce, costing $25 including markup; more typically, one ounce ($462), 10 ounces ($4,570) and one kilogram (32.15 ounces, $14,530) Price behavior: the same as the spot price of gold Advantages: low markup on large bars (2% to 3%); portability Disadvantages: cost of storage (usually in a bank vault) and insurance (about $50 a year); cost of selling -- dealers may require an assay at $25 or more a bar

BULLION COINS For whom: conservative investors who wish to own small amounts of gold Where to buy: most banks, stockbrokers, coin dealers Smallest investment: 0.1-ounce coin, recently $53 including markup, more typically one ounce ($465) Price behavior: the same as the spot price of gold Advantages: ease of buying and selling; portability Disadvantages: higher markup than on bars; cost of storage and insurance (about $7 a year per coin)

COLLECTIBLE COINS For whom: collectors Where to buy: bullion and coin dealers, auctions, numismatic shows Smallest investment: about $165 for a quarter-ounce $10 American gold piece minted between 1867 and 1933 Price behavior: usually rises and falls less than the spot price of gold Advantage: value may hold up better than for bars and bullion coins Disadvantages: poorly defined market value and difficulty of finding buyers willing to pay top price; cost of storage and insurance

GOLD CERTIFICATES For whom: conservative investors, particularly those interested in buying small amounts at regular intervals Where to buy: brokers, large banks and one dealer, Deak International Smallest investment: $250 in systematic buying programs that let you subsequently invest as little as $100 a month Price behavior: the same as the spot price of gold Advantage: low dealer markup (3% to 3.5%) Disadvantage: annual storage fee (usually 1%)

MUTUAL FUNDS AND MINING SHARES For whom: aggressive investors Where to buy: stockbrokers, financial planners, by mail from no-load and low-load funds Smallest investment: The price of one share of an individual company; usually $250 in a mutual fund Price behavior: more volatile than the spot price of gold Advantages: maximum gains when the gold price rises; dividend income; no storage costs; diversification and professional management in funds; ease of buying and selling Disadvantages: maximum losses when gold prices fall; high political risk of South African mines; risk of loss if a mine turns unprofitable

CHART: TEXT NOT AVAILABLE CREDIT: BOB CONRAD CAPTION: Gold vs. gold stocks Gold-mining shares, measured here by the Toronto Stock Exchange gold index, usually exaggerate price swings in bul lion, as explained in the text. But the rela tionship changed briefly in 1985 and '86, when investors fled South African mines. DESCRIPTION: Gold price and gold-mining share index, 1983-1987.