Are the Gold Bugs Wrong?

By Jeff Clark, Senior Precious Metals Analyst

NEW YORK ( Casey Research) -- What a ride the precious metals have been on recently. Gold and silver prices have fallen off a cliff, while gold stocks were thrown on the rocks and left for dead. GLD has seen record outflows.

Popular financial news shows featured guest after guest who proclaimed gold is now "officially" in a bear market, emboldened by the fact that in spite of its recent bounce, the price has languished below its September 2011 peak for 20 months. As a group, gold stocks are down an abysmal 54% over that same period. The capitulation process has been brutal.

So, were we wrong? Is it time to admit defeat, sell our positions, slink into a cave, and lick our wounds?

Absolutely not.

The only thing that's changed over the past 60 days is the price of gold, and perhaps the mainstream's perception of our industry. The realities of the fiscal and monetary state of the world, however, have not.

What has struck our industry was not the consequence of a shift in fundamentals, but rather a number of transient factors, including: (i) growing belief in the general investment community that inflation will not result from global money-printing efforts; (ii) claims the global economy is improving; (iii) Europeans fleeing their economic troubles buying U.S. dollars (which makes the dollar look strong ,and hence gold less appealing to some); and (iv) a very large gold sale that caused the gold price to breach what are called technical support levels, triggering a cascade of further selling. All of this -- and a lot of commentary based more on opinion than fact -- has led to the misguided conclusion that gold is a has-been asset.

Casey Research readers know we think inflation is inevitable, but even if deflation were more likely, it is the fallout from a world living beyond its means in which most major central banks are massively debasing their currencies in an attempt to prop up ailing economies that worries me.

These stimulus policies are unprecedented in scale, entirely unsustainable, and induce financial-system instability. And somehow, it is widely believed that the same policymakers who concocted this mess can get us out of it. Our views haven't changed -- yet suddenly, we're contrarians again.

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