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Gold Investors' Stress Test

By Jeff Clark, Senior Precious Metals Analyst

NEW YORK ( Casey Research) --We've spent the past couple issues of Big Gold and the International Speculator examining our recommended companies in depth.

We've analyzed all-in costs, tracked insider holdings, and projected stock prices based on lower metals prices. We've monitored political risk, reassessed the viability of projects, and examined past corrections to determine when gold might bottom.

But there's one factor that trumps all these.

The investor's attitude. More specifically, his or her emotional reaction to the gold industry's current retreat. After all, even if a company has high-grade projects, top management, low political risk, and below-average costs, it doesn't do the investor any good if they don't own the stock.

The realities of gold's price action over the past couple months dictate that our emotions not control our investment actions. We should coolly evaluate the circumstances based on facts, trends, and historical similarities.

Let's look at some of those facts and consider their implications.

Gold has had huge corrections within bull markets before.

Consider that gold fell...

  • 29.5% in the autumn of 2008
  • 22.6% in the spring of 2006
  • 47% from 1974 to 1976

Today, gold has fallen as much as 28.5% from its 2011 high (based on London PM fix prices). Yet none of these corrections signaled it was time to sell.

The fundamental case for gold is growing, not lessening.

In spite of the downtrend in the price, the conditions that support owning gold are increasing in importance. The U.S. and Japan alone will flood the world with almost two trillion new currency units (dollars and yen) over the next 12 months. Europe's problems have not been solved, and the eurozone continues flirting with recession. As of last month, not one G20 country had a balanced budget. The current fiscal and monetary paths of many major countries remain unsustainable. No amount of gold selling by short-sighted traders and hedge fund managers has changed any of these facts.

One might argue that these issues have had less of an effect on the gold market than we expected, but the effects of these actions have not played out yet. There is no easy way out of the corner our political leaders have painted themselves into. In other words, the damage has already been done to our fiscal and monetary systems. The endgame to the global debt situation hasn't changed, and when the ramifications begin setting in, investors will return to the gold sector.

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