RealMoney

My last substantive discussion of gold was two and a half years ago in the column, Gold Primed for a Another Fall, when it was trading at about $1,700 per ounce. 

I advised then that the price would probably decline much further and followed that column with a few columns on the subject, as the price did indeed decline. 

Gold has now fallen by about 28% since I wrote the first column referenced above, and is down about 35% from the cyclical peak of about $1,895 reached on Sept. 5, 2011.

The cyclical peak to trough decline has been about 40%, from $1,895 to $1,142 set last November 5. Since that cyclical low was reached about six months ago, gold has increased in price by about 7%. 

There is a  reason for providing all of that information as a precursor to the rest of this column . It is that at the current price point gold has now achieved a real rate of return adjusted for inflation and dollar depreciation of 0% since 1979, before accounting for storage costs and transaction fees.

This is important because if gold is viewed as "money", then this is what it is supposed to do: maintain its purchasing power vs. the differential growth of money supply to production in price and constant dollar terms.

 I do not foresee, however, an imminent move higher for gold prices. It is more likely that, as occurred during the post 1980 bubble ,that the price will move sideways and perhaps even decline in real terms for the foreseeable future.

But as I concluded the column with 2.5 years ago, the decline in price that I anticipated would occur -- and has now occurred -- would be a cyclical bear market correction within a secular bull market for gold . And that the price would eventually reverse and move to the $4,000 level and higher, as was the prevailing meme among gold bulls when the price was at its cyclical high of $1,895.

The $64,000 question now is whether or not the global deflationary forces of the post-Lehman era have passed and that a secular reflationary period has begun. If that's true, then gold and the associated miners and ETF's will perform well from this point forward. The general meme within the global capital markets is that this is the case.

Jim Cramer has been very vocal about his belief that the Chinese economy has bottomed and is in the process of growing again. I do not believe this to be true ,but I am open to the possibility that I'm wrong. 

Others are of the opinion that the worst has passed for Europe, the U.S., and even Japan. As a result they believe that the stage is set for a secular reflationary trend that will be coupled with increased economic activity, trade, job creation, and inflation that will require increasing long-end yields throughout the world. 

I am not in this camp either, however,  and believe that there is still another bout of global deflation and much lower long end yields -- especially in the U.S. -- before the post-Lehman era deflationary forces finally conclude. Again, I am open to the prospect of being wrong. 

As pertains to gold, the miners, and ETF's though, whether I'm right or wrong, the majority of the correction in their values from their cyclical peaks is most probably already concluded. As such, there is little downside left. From a principal protection standpoint, they may even appreciate as a result of a flight to tangible assets if the deflationary forces return

 In the past 2.5 years the Market Vectors Gold Miners ETF (GDX) has declined by 55%, but is also up 14% year to date (YTD). The Central Fund of Canada Limited (CEF) is down 46% but up 7% YTD.

In both cases, the declines have been far greater than the decline in gold prices. The last time they were trading at these prices was in the months following the collapse of Lehman when gold was in the $950 range. Even with the rebound so far this year, these ETF's are priced for gold to decline even further.

 Of the miners, Newmont Mining Corporation (NEM) is down about 40% in the past 2.5 years, but up a whopping 45% YTD. Freeport-McMoRan Inc. (FCX) is also down about 40% in the past 2.5 years, and down about 2.5% YTD. Even with Newmont's stellar performance this year it is trading almost exactly at its post Lehman low of late 2008. 

Regardless of whether a global reflationary environment has begun, or if  there is another bout of deflation before that occurs, gold, the miners, and associated ETF's have already experienced most of the downside that may logically be expected. They represent a store of value at current prices.