Time to Stress Test Your Resolve in the Gold Markets

By Jeff Clark, Senior Precious Metals Analyst

NEW YORK (Casey Research) -- The Casey Research Metals and Mining team has received a number of worried and angry emails about gold's recent rollercoaster ride. I'd like to respond to them.

First, I understand. I'm an investor, too, and I also manage money for family members. We have positions that are underwater, a few dramatically so. Worse, in many cases a full position had been built, seemingly leaving no room to average down and lower our cost basis. This predicament isn't fun, and there are a limited number of options.

However, instead of responding emotionally, let's look at some facts and consider their implications.

The drop in stock prices came with no drop in the quality of the companies' assets. This is important to recognize because it highlights the difference between value and price and points to opportunity. Even at lower gold and silver prices, the value of these companies is higher than they're currently priced. This will eventually correct, as all mispriced markets do.

Investors must be willing to hold through down or sideways markets to realize profits. The trend we're betting on took an unusually large detour, but it has not changed in any material way. It may take some time for the market to stabilize before it makes a significant move up, and with summer knocking on the door (often gold's low season), we could easily see the gold market remain weak for a few months. A huge rally in the immediate future is unlikely unless a black swan hits (for example, a deterioration in European sovereign debt, a sharply lower US dollar, bank failures, etc.). The message is that, like any market with favorable fundamentals, you must have the mental wherewithal to stay in the game, however painful, in order to seize a big profit.

A lifetime buying opportunity is shaping up. By any analysis, gold stocks are about as cheap as they've ever been. Therefore, focus on positioning yourself ahead of what we think will be an extraordinary reversal. The more spectacular the selloff, the more spectacular the opportunity -- and this selloff has been one for the record books. We're witnessing a setup that only comes along a few times in an investor's life. Our goal is to prepare for it, not lament an unexpected trend interruption.