By Adrian Day The Global Analyst

Gold's steady decline from early October to a six-month low has many analysts wondering aloud if the long bull market is over. And a few clients are wondering if we should be selling our gold stocks. We don't think so.

One can't be sure how much lower or for how much longer gold will fall, but we are closer to the bottom than the top, for both gold and gold shares. The fundamentals remain positive, while valuation indicators are near long-term lows.

There has been a cascade of factors over the past five months driving gold down from what was arguably an exaggerated high, culminating in a series of recent news:

* Improving U.S. economic reports along with a strong global stock market, has led to a sense that gold was no longer so necessary.
* An increasing focus on a future end to Federal Reserve stimulus.
* The eurozone crisis appears to have eased, or at least gone off the headlines.
* Gold had been trading in sync with the euro.
* Hedge funds were exiting gold at the end of the year, and several filings confirmed this, notably news that George Soros had cut his gold holdings in half, and other funds had sold completely.

While the factors listed above are valid to some extent, they are exaggerated or distorted in my view. Although the U.S. economy has been improving, one can hardly call it robust, while Japan and Europe both reported weak GDP numbers last week. For the U.S., unemployment remains high, as do debt levels.

And while stocks have experienced a strong run, the fact that retail investors have started to pour money into equity funds, for the first time since mid-2008, should give a contrarian pause as to how long this rally may last.

Though "some members" of the Federal Open Market Committee think bond buying should end, the Federal Reserve has made clear that the "very accommodative" monetary policy would continue, even after the economy had improved.

With the new government in Japan embarking on a new easy money course, and the new governor of the Bank of England suggesting that more stimulus is needed, easy money is global, and it is difficult to imagine policy here or overseas tightening any time soon. Monetary policy remains very supportive of gold.

Meanwhile, for a contrarian, the fact that hedge funds have sharply reduced their gold holdings is a positive sign. Perhaps at the next budget impasse in Washington, they will exit stocks and move back to gold.

Another contrarian indicator is the rapid increase in the short selling of gold. According to Standard Chartered, there are 168 tons of gold sold short, well over the five-year average of 100 tons. What has been sold short, has to be bought back eventually.

Lastly, various indicators have reached new extremes, including the oscillator indicator back to extremes last seen at the beginning of 2009, suggesting a near-term reversal.

The clear breakdown of budget talks may provide the trigger for selling the stock market and moving back into gold.

This is a painful period for holders of gold stocks, but we have been here before and come through it. From the all-time high (September 2011) to today's level, the decline in gold has been 19%.

We have seen much sharper declines before in this bull market, 23% in 2006 and 29% in 2008. Both times, gold snapped back sharply, exceeding old highs within a year.

The stocks had sharper declines, but more dramatic recoveries. Following the stock decline in 2005, the Philadelphia SE Gold/Silver Index ($XAU) rose over 159% over the next year. From the 2008 lows, it jumped over 100%.

Many of the junior stocks moved even more. Indeed, most of our current buys would be among the juniors, which represent better value now. Our best buys include: Vista Gold (VGZ) and Almaden Resources (AAU) -- as well as our core holding Franco-Nevada (FNV).

On a multi-year basis, our returns in gold have been quite satisfactory, notwithstanding the volatility. We want to be buying now, and look forward to good returns from these levels over the coming months and year.

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