bmilner@globeandmail.com

July rarely inspires fond memories among the gold crowd, and the month just ended was no exception.

Along with its usual summer doldrums, the metal took a direct hit from receding fears of a sovereign debt disaster, strengthening currencies and a renewed appetite for risk. Pension funds and other institutional investors have never been too enamoured with gold. And it didn't help that a handful of influential analysts poured cold water on its long-term value as anything other than an increasingly expensive insurance policy.

Gold plumbed a three-month low and investors fled once-booming exchange-traded gold funds at a pace not seen since the spring of 2009.

You could hear metal detractors humming their favourite tune, The Party's Over.

But even perennial critics acknowledge that it might be a tad premature to write the ending for the latest gold rush. And as if on cue, the metal regained some lost ground on Friday, prompting one Chicago analyst to tell Bloomberg that "the correction may have run its course."

True gold believers remain more convinced than ever that its best days lie ahead, if only because its value as a safeguard against all manner of political, economic and currency-related calamities is surely going to rise in the troubled years to come. In a world full of unknowns, it seems only natural to gravitate to the oldest of wealth preservers, even if, like me, you have a natural aversion to anything that doesn't earn interest or pay dividends.

To say gold doesn't have a role in a diversified portfolio today requires people to conclude that the politicians really know what they're doing and have the deteriorating fiscal situation well under control, argues John Hathaway, portfolio manager of the Tocqueville Gold Fund.

Needless to say, Mr. Hathaway has no such confidence in anyone who has to face an electorate any time soon. Austerity may play well in sound bites, but actually imposing deep, lasting cuts is another matter.

"It seems to me you reach a point where more of the electorate has a stake in government support of some kind or another," he said the other day from his summer residence in Vail, Col. "There's no way to get scientific about it, but you reach a point where unwinding all of that - or at least stabilizing it - becomes very difficult and potentially very contentious ... Meaningful austerity is almost unthinkable in the Catch-22 of this macro moment."

Once you make the perfectly rational assumption that the fiscal woes and questions over the trustworthiness of government paper assets, including sovereign debt and currencies, are here to stay "within a reasonable investable time frame," it makes sense to have some gold exposure, he says.

"Only a miraculous renaissance of the private sector will reverse the flow of capital into safe havens, including gold," Mr. Hathaway wrote in a recent commentary. "For this to happen, the political landscape must undergo fundamental transformation. If such is to be the case within anything other than a multi-year time frame, it will ... turn out to be one of the greatest surprises in history."

Mr. Hathaway doesn't subscribe to the dark, end-of-the-world-is-nigh visions held by the lunatic fringe among gold bugs. When he and his colleagues at New York-based Tocqueville Asset Management set up a fund dedicated to the precious metal a dozen years ago, they were simply convinced that it made sense as a contrarian bet in the midst of the crazed Internet stock bubble of the late 1990s. About 90 per cent of the fund's assets consist of mining stocks and about 10 per cent is in actual bullion, mainly because in the early years, there were no ETFs, which he strongly recommends for ordinary investors.

What about the argument of gold naysayers that if confidence in, say, the U.S. dollar or the euro ever evaporates, it would make more sense to acquire real estate or other suddenly cheap assets of greater economic value?

"I don't think gold excludes other strategies," he says of an event that is not on his horizon at this point. "For those who have liquidity to scoop up bargains in that atmosphere, that will be a great investment. But maybe one way to have the liquidity is to have some gold exposure."

The key, he says, is to think of gold as a strategic long-term investment. "Anyone who tries to trade it is just asking for trouble. You want to be smart about it. Don't buy it when it's on the front pages, as it was back in April. I frankly think it could go to sleep this summer and maybe pull back into the fall mid-term elections [in the U.S.]. Anything that's had a run like that deserves to have a pause. But I would be alert to those opportunities."

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