To get a read on things, Fortune caught up with Rachel Benepe, co-manager of the $3.1 billion First Eagle Gold Fund (SGGDX). Along with Abhay Deshpande, Benepe stepped into the very big shoes of Jean-Marie Eveillard when he transitioned to a senior advisor role at the fund in March 2009. And they haven’t tarnished the fund’s reputation yet: Had you invested $10,000 in the fund five years ago—which only requires a minimum of $2,500—you would be sitting on $18,766 today, as opposed to losing money in the S&P 500.

Let’s get right to the point. Are people insane to be buying gold at these levels?

We don’t forecast the price of gold, and that’s because we view it as a hedge. Considered from that perspective, no one can really say if it’s too expensive or not, as long as the price moves for rational reasons. Look at the price changes since Lehman failed in 2008. Every move of gold has happened for a rational reason. We haven’t seen a single move out of context. Last week, there were obvious issues in the U.S. and Europe that kind of came out of left field, and gold hit $1,800. Is someone insane for wanting to protect their portfolio? I don’t think so. Keep in mind, too, that more and more people are becoming aware that it can serve as hedge. That, too, has been driving up the price. But to say it’s mispriced is the wrong way to look at it. It protects your purchasing power. Gold should go up when equities go down. It doesn’t matter which way it’s moving, either, as long as it’s happening in a rational way.

Another way you can look at it is you can buy gold above ground —that’s bullion — or you can buy gold below ground — and that would be through mining stocks. While I did say you couldn’t call gold overpriced or underpriced, we still want the cheapest ounces possible, and stocks offer a much less expensive way to get them at the moment. Since the beginning of the year, many central banks, which can only buy bullion, have been doing just that. And that’s caused the prices of the mining stocks to underperform — gold bullion is up more than 20% in 2011, but the sector ETF, GDX, is down 3.7%. Gold stocks normally show 2 to 3 times leverage on any move in bullion, up or down. So they are definitely lagging.

Does geography matter if all gold is the same once it’s out of the ground? Are there countries that you avoid?

Absolutely. We have places that we are more cautious of because of political risk. We tend not to own Russian gold mining companies. We worry about the possibility that if you find something really good, you may no longer be able to hold onto it as a foreign investor. So nationalization is certainly a risk. The same goes for Venezuela. We also don’t really want to own Chinese gold mining companies. We own one Canadian company that has mines in China. We tend to want to invest where there is defined mining law, established mining labor, and where issues of taxation and ownership are clear. Mind you, we do analyze risk in the context of mining industry, which means that things that are safe jurisdictions from normal stock perspective might not be good in gold. An undeveloped gold mine in Alaska, for example, could be a far riskier investment than a mine in South Africa, starting with environmental issues and moving on from there.

So what stocks do you like right now?

The South Africans offer some interesting opportunities at the moment. Because we view it as a hedge, and not like the gold bugs who think it’s going up forever, we like mines that are in production with proven and probable reserves. South African mines have long reserves, they’ve been operating forever, and they have a clear path for getting gold out of the ground. Newcrest Mining is our largest holding. We also like Goldcorp (GG). They operate large, multi-asset companies, and do a good job of managing portfolios. They offer investors a lot of ounces, in safe jurisdictions. And we like that.

What about gold companies that hedge?

We don’t buy them. They have taken a view of the metal, and we’re not asking for that. We want access to the ounces. We want leverage up or down. We don’t want some CEO’s macro view on the price of gold. Sometimes they have to do it to protect the economics of a project, and while that can be acceptable, we tend not to buy them either. We avoid those companies that hedge.

But you still own bullion, right?

Yes, we do. We have about 17% in bullion and the rest in stocks. And we’re fully invested—we’re not sitting on any cash.

What about individuals? Should I be hoarding gold bars right now?

In our view, the best way for an individual investor to buy gold is through an actively managed gold fund. While gold mining companies all mine the same good, each mine has its own economics and its own unusual situations that make the assets you’re buying very different. You’re better off with a portfolio manager who is talking to all those management teams and has people on the ground who will undoubtedly understand those differences better than you would be able to. Plus, if you’re looking to have a bullion component to your portfolio, it’s pretty hard to do that as an individual. You still have to buy a security—which represents one tenth of a gold bar—whereas we buy bullion itself.

What about the percentage of gold in my overall portfolio? Should I go whole-hog if I am worried that the world is going to end?

We generally suggest around 10%, and especially so in this type of uncertain environment. But any more than that and you’re speculating. And an allocation of less than 5% won’t protect your portfolio effectively from anything. Everyone knows that many things are going wrong in the paper monetary system right now. But that doesn’t mean that any of the worst-case scenarios are actually going to happen. We all want a world—and that includes us at First Eagle—where you don’t need a gold hedge. Unless you really want to be speculating that all those bad things are going to be happening, we’d keep it below a maximum of 15%.

Are we going back to the gold standard? I’m hearing a lot more people talk about that these days, not the least of whom is Ron Paul.

You always have had people who think that. From our standpoint, the primary problem with the paper money system is that central bankers always have the option to print more money. It’s hard for them to have the fortitude to actually deal with issues instead of inflating their way out of them. But I really doubt we’re going to see a full gold standard any time soon. What we could see is central bankers realizing they all need a real allocation to gold in their foreign exchange reserves. It’s been around for thousands of years, whereas paper currencies come and go. And it’s accepted by both dictator and democracy alike. At the end of the day, it’s the ultimate currency.