The Battle for $900 Gold

Some investors, their hopes dashed that $1,000 would be quickly and decisively overrun, are seeing disaster in this correction and dropping their gold as they run for cover.

So... do we at Casey Research think we're now seeing a reversal in gold's fortunes?

In a word, no.

I'm not going to go into meticulous detail here, but I do want to share some thoughts with you that may be of some use... if for nothing more than playing them back to me in sarcastic e-mails several months down the road if we're proven wrong.

A few key things to ponder as the battle for $900 gold rages...

1. The current correction is not yet exceptional. Since the current bull market began in earnest in 2001, there have been nine corrections in excess of 8%.

During the three worst pullbacks, gold fell 15.98%, 18.27%, and 27.7%, respectively. And the average of all nine corrections is 13.6%, so the latest, which touched 15% at its worst (so far), is only fractionally worse than average.

Put another way, for the current pullback to match the sharpest correction to date, a drop of 27.7%, gold would have to fall to about $730. Could it happen, again? Sure, why not?

And if it does, rest assured that analysts will line up to say the back of the gold bull has been broken... just as they did when gold moved down by that percentage in May 2006, falling from $725 to $567. But if you had listened to the naysayers back then and bailed out at the bottom of that correction, you would have missed a rebound of close to 100%.

I mention this to stress that the fits and starts we are currently experiencing are nothing unusual. Quite the opposite, they're the norm for any sustained bull market. In the sustained gold bull market of the 1970s, a similar pattern occurred.

The bottom line is that if you are going to invest in the resource sector, you need to take a long view. And I would stress once again, you have to be invested with money you can afford to lose a substantial portion of and not be overly concerned. Otherwise you'll invariably become shell-shocked during periods of volatility and be prone to breaking ranks and selling at the worst possible time.

2. The big gold companies are delivering. One of the largest mining companies in the world, Newmont Mining, just released its first-quarter 2008 financials, the first of the big gold producers to do so.

As we have been forecasting, the company had record sales of $1.94 billion, realized a record price of $933 per ounce sold, and saw its cash operating margin soar by 119% from the same period last year. Further, net income was up 444% from the first quarter last year. And the company's cash operating margin rose to a record $537 million in the first quarter this year over the prior record $419 million earned in the previous quarter.

Over the next couple of weeks, we'll see a string of similar results from the other major producers, offering a stark contrast to the billions upon billions in losses being suffered by the banks, investment houses, housing industry, airlines, etc.

So, what happened to Newmont's shares on releasing its financials? They fell, albeit modestly, victim to this week's softening gold price and a dumb remark by the minister of mines of Ghana – where Newmont has significant projects – about the need for mining reform in that country.

The key point is that the increase in the profitability of the gold miners, a prerequisite for the entire gold share complex to get moving, is now materializing.

3. Oil is stubbornly holding on over $100, and food prices are on the rise everywhere. This is simply the most visible evidence of the inflation now gripping the world.

We've said for years that there is a very tight correlation between rising oil prices and rising gold prices. While oil prices may moderate at some point – because, again, no market goes straight up or down – the trend is clearly for sustained high prices. This is additional support for gold in our view.

So... given gold's correction, you might go right ahead and sell your gold. I'm hanging on to mine. And if I'm hanging on to my gold, I'm hanging on to my gold stocks, because that's where the real juice will be.

When I look at the alternatives and the amount of risk I have to take to get even a 10% return right now, I am comfortable biding my time, continuing to buy gold and gold share bargains with the expectation that the 100%, 200%, and 500% gains down the road will catch me up in a hurry.

Good investing,

David Galland

David Galland is the managing director of Casey Research, publishers of Doug Casey's monthly International Speculator advisory. For more than 27 years, Doug Casey and the Casey Research team have provided investors with unbiased research on investments with the potential to provide double- and triple-digit returns by tapping into evolving economic and investment trends ahead of the crowd.