By Declan Fallon of Covestor.com.

While the S&P 500, Dow, Nasdaq and Russell 2000 run around the playground and ride the seesaw, is there a place of refuge for the responsible to take advantage and earn some money?

Gold has historically been the safe haven for the fearful, but has gold had its day? As with any story, there are two sides.

The secular bull market in commodities is alive and well. What the commodity market is experiencing is a cyclical correction. While the stock market is also experiencing a cyclical move (not a correction), it does so as part of a secular bear market. To make the case, the Commodity Research Bureau price index is testing 2007 lows while the S&P is trying to test 2002 lows, having surpassed all support up to today.

So why not gold? Three things make gold less attractive:

  • First, the dollar looks to have found some footing -- even if this strength is only relative, i.e., other currencies are devaluing faster than the dollar. The ratio of the U.S. dollar index to the euro index has pushed from a 16-year low of 0.45 to 0.60 (1.43 high in 2001).
  • The second reason is valuation; gold has gone from a 2001 low of $255 an ounce to a peak high of $1,033 an ounce, and it now trades at $839 (that's an 18.8% loss from the high and a 229% gain from the low). Silver ranged from $4.01 an ounce to $21.44 over the same period and trades at $11.06 (a 48.8% loss from high and a 175% gain from low). Market bottoms occur only when everything sells off. At current valuations, gold has not. Gold bugs will argue that "this time is different," but as history shows, things are never different - it's just the story that changes.
  • The third reason gold is less attractive is the behavior of gold miners' stocks. Is it any surprise to see Barrick Gold (ABX) 46% off its 52-week high? Compare it with the silver miner Pan American Silver (PAAS), which is down 66% from its high. Investors in gold miners have priced in a gold decline. In a simple ratio extrapolation, a 1.34% drop in Pan American reflected a 1% drop in silver. So on the basis of the drop in Barrick, gold could fall 34% (to about $682 an ounce). If Barrick were to follow through on its head-and-shoulders pattern, gold could drop as much as silver to $531 (near 2006 lows).

At its simplest, when gold suffers as other commodities have, it will mark a bottom. Declines are likely to continue for other commodities until gold joins them. Eventually, the global economy will find its footing, and industrial and energy commodity demand will slowly rise.

This market already has plenty of scare-mongering and fear, but history has shown that these environments are opportunities to prosper, not panic. Emphasis is placed on peak buyers, not opportunists. Individuals who invested in 1932 would have made out like bandits as peak buyers broke even. However, early birds who saw the 1929 meltdown as an opportunity to buy would have suffered, given that time and inflation reduced the 75% return to 1954 as meaningless.

For this reason, we need to focus on the secular trend -- not the secular bear of stock markets but the secular bull of commodities. Gold looks destined to challenge $1,000 once more, but under a strengthening dollar it may succumb. Whether this happens or not, remaining commodity prices will provide opportunities to bottom-fish. Industrial metals in particular will benefit in a recovering economy.

We are six years into a 20-to-35-year secular commodity bull market. It's time to take advantage.

At the time of publication, Declan Fallon had no positions in ABX or PAAS. Positions may change, so click here to view their current portfolio. Declan Fallon has their investment record verified by Covestor.com. Visit Covestor.com to track the real investments of thousands of proven self-investors live for free.

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