As the calendar pages turn to December strategists have a near panic compulsion to review the past year, and develop an outlook for the one about to arrive. One of the thoughts while engaging in this activity is that the readers will hopefully lose their copies before the end of the forecast year. Regrettably, with the widespread use of computers too many are saving these discourses.

What seems to mark the review of 2002 is how things came out so far different than many had expected. The myopic analysts on Bay and Wall Street had forecast at this time last year that 2002 would be good to equity investors. In the other corner were the individual investors that had previously widened their scope of vision, and had come to understand the market dynamics at play. This latter group moved into Gold, and Silver. As a consequence their investment results were substantially better than those that were handicapped by an irrational addiction to paper assets.

Perhaps the one forecast of a year ago most remembered by this author is that the stock market would be up in 2002 because it had never been down three years in a row. Now the natural world does seem to be bounded by ranges that develop over time. Rarely are life and investment so predictable. Despite the decades of recorded temperatures, on a regular basis some locality will experience a new high or record low temperature. Time seems to have a knack for expanding expected ranges rather contracting them.

We suspect that another item of faith on the part of stock groupies will too go down as lore rather than reality. The same set of historical data that gave this incredibly wrong forecast for 2002 leads to the belief that one can never, ever lose money in the stock market over a ten-year period. As a rationale for managing money that assumption seems a little weak. "Cause it never happened before" is turning out to be a poor justification for an investment strategy.

One afternoon recently we listened to a regular cable news show that likes to feature a fast paced roundtable of stock market experts. And by the way, expert is defined as someone that always has a bullish outlook on the equity market regardless of what is going on in the world. Terrorists could nuke New York City and they would be talking about a rebound in technology stocks. While that may be part of the problem, it was not where we intended to go.

The voices of these experts were quivering with excitement over the giant pre-Thanksgiving(U.S.) rally. In days past one could sense the near panic within them as they looked forward to explaining another miserable year of investment results to their clients. By the time the session was over the group had the stock market so healthy that it would likely finish 2002 in positive territory. Of course that could happen, but more likely is one of Franklin's pigs learning to fly.

A lot could still change before New Year's Eve, but the results to date are not encouraging for the "We Love Allen Greenspan & Financial Paper" crowd. As we are writing, the DJIA is off 11% for the year, the S&P 500 is down 18% and the NASDAQ Composite has slumped 24%. In a former life and in a former time, we had the opportunity to explain such numbers to clients. Those scenes are not usually pretty ones.

Alternatives did exist if only these gurus had possessed open minds, able to see past and beyond their delusions over paper assets. Their clients would certainly have appreciated it. Gold over the same period has risen 15%. Even Silver did considerably better than stocks, being off only about 0.4%. That's right folks, those Gold and Silver coins you own beat some of the best and brightest on Bay and Wall Street.

While certainly the year is not yet over, the longer term record being built is not very impressive. That is, unless own owned Gold. The graph, MORE GLORY FOR GOLD, shows the results. The investment world is not looking good for the stock addicts. And one would think that with a whole five years to ponder matters some of those gurus on Bay and Wall Street might have figured out Gold was attractive. With five years already in the negative, that fairy tale from history of ten year returns being always positive is increasingly at risk.

The real issue is tomorrow, we realize. Importantly Gold is undervalued. Fair value is about US$505, well above today's price. Valuation is an important leading indicator of markets. Valuation does not make a market go up or down, but indicates that conditions are ripe for a revaluation to occur. Essentially valuation tells us that today's price for Gold is still attractive and not expensive. Regardless of whatever backing and filling occurs, this Gold market is going up over time.

Now some might like to take issue with our estimate of fair value and the long-term target of US$1,260. The work behind these numbers is certainly more reasonable than that which went into the making of the "Dow 36000" forecast. Doubters do not other us for most were those that held on through the NASDAQ reaching over 5000 and then crashing. Criticism of bullish investors in Gold and Silver by those that have lost billions of dollars in equities may be the one of the more positive factors for Gold and Silver.

Vast numbers of financial advisors continue to have their clients buried under piles of financial assets. Gold is still not included in the investment models and programs in most of the major firms. Millions are still being spent on analysts to follow the soon to be forgotten technology stocks. Millions are being paid to portfolio managers of mutual funds to continue arranging paper assets despite the collision with a giant iceberg of a bear market.

What all this means is that Gold is still vastly under owned in investment portfolios. Paper assets are still over owned in investment portfolios. However, the pendulum is likely swinging away from paper assets. Money market funds where the advisors make more money than the investors seem like ridiculous alternatives. And how about a ten-year U.S. Treasury bond that will provide a whopping 4.25% return over the next ten years? Quite simply the financial advisory industry is shooting itself in the head. Gold can only rise as a percentage of investment assets under these conditions.

If attention is shifted to the next graph perhaps we can move on beyond this tirade. This graph tracks the buy signals from our overbought/oversold indicators. Recently another buy signal was given. With optimism raging over the recent rally in equities, that conditions are conducive to Gold rallying would seem reasonable.

Optimism that the U.S. economy has no problems seems to be gaining hold again. Despite a continuation of the horrendous $500 billion current account deficit, a dollar that has broken down, a $400+ billion government deficit, a housing boom close to an end and an economy increasingly supported by a giant mortgage refinancing bubble, things are looking up on Wall Street according to the cable news experts. The buy signal on Gold looks increasingly interesting with all this optimism on paper assets.

What must also be understood is that this buy signal is on Gold, not necessarily Gold stocks. We again reiterate our view that Gold stocks are not Gold but stocks. Gold stocks can act quite differently than Gold. Gold stocks may become over value or under valued relative to Gold. Quite simply Gold stocks may go through periods of performing better or worse than Gold. The next chart helps to understand this situation.

In this chart is plotted the ratio of the market value of a set of popular Gold stocks to the price of Gold. This set of data has been indexed to a base of March 2001. Part of the reason we used that date is it is one year after the equity markets peaked. That time period also is sufficiently long enough to allow attitudes and positions to ettle.

That the ratio is up materially from the starting point for the graph is a clear sign that Gold stocks have performed substantially better than Gold. We also know that Gold and Gold stocks have performed substantially better than the general equity markets. But no trend is permanent, and Gold investors more than most should be aware of that.

Notice that the ratio hit a peak in May 2002. Up till that time the ratio had risen substantially, documenting the strong performance of Gold stocks versus Gold. Such is the type of move that investors had been seeking. What needed to be remembered is that superior performance such as occurred could not be expected to continue. And not only has the relative performance weakened, some of the Gold stocks have had poor absolute performance. Again we find that no "silver bullet" to the investment problem exists.

The ratio now indicates that over the past nine months Gold stocks have under performed Gold. As already mentioned such periods of relative performance should be expected. For that reason a Gold oriented portfolio should include Gold. Owning Gold stocks as an investor without exposure to Gold itself sets one up for the vagaries of the stock market, as they are stocks.

One of the great problems for an investor develops when a major trend in some area is identified. Most such major trends do not allow for direct investment. We must participate in these shifts through the stock market. That is not the case with Gold. A number of easy methods exist to gain exposure to Gold. Given that reality investors should not limit themselves to Gold stocks but rather own Gold stocks only after they have a foundation built in the metal itself. After building an ownership position in Gold an investor then can go to other strategies, from stocks to long dated call options.

Turning back to the Gold stocks, in hindsight the ratio moving above the upper band in the graph was a strong clue that the relative performance had reached an extreme. The question now is when might investors step back into the Gold stocks. In part the answer probably has to do with the action in the price of Gold. A break out to the up side, which is growing more likely each day, would probably favor Gold initially. The reasons for that guess is the general illiquid nature of the market.

Gold stocks probably would move secondarily to Gold. Therefore, those interested in Gold stocks should probably focus on either of two events. The first of those would be a break out of Gold above $330. From that move a rapid, upward adjustment of Gold's price would be likely. Gold stocks should then follow as Gold moves through, say, $350. A second alternative is to simply wait for the ratio to move into the lower section of the bands.

In closing, let us say again that investors should have a base investment in Gold. After that position has been established investors can look to alternatives. One should always build a portfolio, like a house, from the bottom up. Fortunately Gold is a unique investment concept that allows for investors to easily build that foundation.

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Ned W. Schmidt,CFA,CEBS is publisher of THE VALUE VIEW GOLD REPORT. His monumental report, "$1,245 GOLD" has been read by hundreds, probably saving their portfolios countless millions of losses. Ned welcomes your comments and questions. His mission in life is to rescue investors from the abyss of financial assets and the coming collapse in the U.S. dollar. He can be contacted at nwschmidt@earthlink.net. To receive THE VALUE VIEW GOLD REPORT by e-mail each month click on the button below.