By Eric Roseman Since the start of the credit crisis in August 2007, the XAU Gold & Silver Index of mostly large-cap mining stocks has tumbled 27%. In October alone - the worst month for investors in global stocks since August 1998 - the XAU Index has so far tanked 20%. Gold bullion, however, has gained a cumulative 26% since the outbreak of credit panic in August 2007. As the rest of the markets have crashed this month, gold has only declined 2%. Gold stocks are another story. They have failed miserably so far this year. They're failing despite the fact that mine production will remain flat in 2008. Not to mention, demand is booming among nervous investors who are searching for a safe haven. Also, European private banks have to wait almost three weeks to fill orders for clients - there's barely any net gold supply. What ever happened to gold stocks protecting portfolios during a market crash? Why have gold stocks disconnected from gold bullion lately? On occasion, gold and gold stocks can deviate from each other. This is why you always should hold both physical gold (bars, coins, certificates) AND gold mining stocks as part of your precious metals strategy. Historically, this happens during extreme market circumstances. For instance in late 1979, gold stocks collapsed while gold bullion climbed to US$850 an ounce by January 1980. The same phenomenon took place over the last 12 months. Gold stocks have been absolutely mauled while physical gold has rallied. Gold stocks are now trading at a seven-year high compared to the physical metal judging by the gold-to-XAU Index ratio. That means gold stocks are absurdly cheap compared to the metal itself. This is the time to hold both gold and the precious metal stocks, including silver. The ongoing shift from a world obsessed with rising inflation has peaked since July. The major focus now is accelerated deflation, or an environment of rapidly declining asset values. This is the first time since the 1930s that prices worldwide are simultaneously falling together - stocks, bonds (non-government), real estate, hedge funds and other financial assets. In a deflation, gold should hold its value. But anything traded on the stock market is unlikely to rise in value as the Wall Street tidal wave sinks all ships. And to make it worse investors have thrown out the gold stocks in their scramble for liquidity. Since last Wednesday, they have even started to sell Treasury bonds to meet liquidity provisions or margin calls. Eventually, the world will reflate again. Budget deficit targets in Europe will be smashed, the United States will expand credit like a monster. And in time, inflation will make a big comeback - a far more serious comeback than what we've seen so far. I expect gold stocks to probably double from these bombed-out levels over the next 12-36 months. Prices are extremely low. As a fellow gold-bug, I feel your pain but I urge you to remain steadfast in your gold positions. The enormous cost of this now global bailout will continue to rise. As it does, gold will continue to rise in value.

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