The macro-economic conditions that have supported gold's bull run over the past decade have not changed; in fact, they've become progressively worse. This is the calm before the storm, and last week's intra-day low of US$1,535 an ounce may well have been a bottom.

In Europe, a good storm-watch indicator is the Bloomberg Europe 500 Banks and Financial Services Index -- down around 35 percent over the last year. In the United States, according to a recent interview with Lakshman Achuthan, COO of the Economic Cycle Research Institute (ECRI), "The question is not whether there will be a [U.S.] recession, but when there will be a recession. We are very clearly on record for forecasting a recession to start by the middle of this year."

Gold is universally under-owned by everyone, including institutional portfolio and pension fund managers (Figure 2). Pension fund managers have a fiduciary responsibility to meet liabilities. They use asset allocation to achieve diversification in order to reduce risk, maximize performance and thus responsibly manage their funds. To ignore the best-performing asset class year after year could conceivably expose managers and trustees to legal liabilities (Figure 3).

The traditional view is that three asset classes (stocks, bonds and cash) are sufficient to achieve diversification. But Figure 4 shows that only precious metals offer negative correlation to stocks, bonds and cash; a portfolio that consists of only positively correlated asset classes is not balanced or diversified.

Holding cash for portfolio protection does not work either. Figure 5 shows the dismal performance of five major currencies versus gold since 2001.

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