The fundamental case for gold is growing, not lessening.

In spite of the downtrend in the price, the conditions that support owning gold are increasing in importance. The US and Japan alone will flood the world with almost 2 trillion new currency units (dollars and yen) over the next 12 months. Europe's problems have not been solved, and the Eurozone continues flirting with recession. As of last month, not one G20 country had a balanced budget. The current fiscal and monetary paths of many major countries remain unsustainable. No amount of gold selling by short-sighted traders and hedge fund managers has changed any of these facts.

One might argue that these issues have had less of an effect on the gold market than we expected, but the effects of these actions have not played out yet. There is no easy way out of the corner our political leaders have painted themselves into. In other words, the damage has already been done to our fiscal and monetary systems. The endgame to the global debt situation hasn't changed, and when the ramifications begin setting in, investors will return to the gold sector.

Investors must be willing to hold through down or sideways markets to realize profits.

The trend we're betting on has taken 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 more 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, a major bank failure, etc.).

The message is that, as in 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.

The drop in stock prices exceeded the drop in company NAV, based on lower gold prices.

This is important to recognize, because it highlights the difference between value and price, and points to opportunity. This will eventually correct, as all mispriced markets do. Further, while gold and silver prices are down, many management teams are focusing on reducing costs so that profitability remains intact. This is not true with all companies, however, so it's important to be picky.

A lifetime buying opportunity is shaping up.

By any reasonable 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 rebound. 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 correction.

Consider if averaging down is right for you.

The table below shows the investment required and the impact of averaging down. In our example, the investor initially bought 100 shares at $10, for a total investment of $1,000. The stock has now fallen by 50%. Here's what averaging down would look like (excluding fees), plus projected returns if the stock rises to $12.50 (a 25% gain from its original price) and $20 (100% gain).

For a modest investment of only 12.5% of your original amount, you can lower your cost basis by 10%. Investing half the initial amount brings your cost basis down by 25%. An identical investment lowers it by a third. And your prospective return grows commensurately.

The percentage drop in the stock you're considering will dictate actual results, of course, along with how well the stock eventually performs. The point is that while you can't bring your cost basis down to current prices, you will increase your profits come selling time. Unless you have too much money devoted to gold stocks, our view is that every investor should prepare to take advantage of the selloff.

The bottom line is that during this downdraft, let's have the big-picture forces guide our gold investing decisions, not our emotions.

"Gold Investor’s Stress Test" by Jeff Clark .. Casey Research