Montreal, Canada

Gold's decline from a nominal high of $1,216 an ounce in early December to $1,053 this morning is drawing a rising chorus among some distinguished bears that the nine-year bull market is over. Some pundits claim gold is in a bubble.

The world's greatest hedge fund manager since 1969, George Soros, was recently quoted on Bloomberg claiming "gold is in a bubble" while renowned economist, Nouriel Roubini, believes the gold bull market is over. In the absence of inflation, the latter thinks gold should be sold.

Nothing could be further from the truth.

The Sovereign Society and my Commodity Trend Alert service have been bullish on gold since about $400 an ounce and we remain positive for many reasons, namely out-of-control U.S. deficit spending, sovereign government debt accumulation, declining global gold production, growing currency chaos and, ultimately, high inflation over the next 3-5 years as the Fed fails to drain excess liquidity from the financial system.

It's amazing to hear from some investment gurus that gold is in a bubble. How can an asset such as gold be in a bubble when its inflation-adjusted price is about $2,300 an ounce? Also, the gold price is only 24% higher than its nominal high in 1980. These are not bubble criteria by any means. The NASDAQ, U.S. and Spanish housing, Chinese equities and real estate and Brazilian bank balance sheets are or have been classic bubbles, but not gold.

My bullish stance on gold went into "maximum overdrive" starting in late 2008 when the Federal Reserve announced its plans to start "quantitative easing," the codeword for monetizing government Treasury or government agency debt (GSEs) in a bid to keep mortgage-backed securities markets liquid and to mop-up excess Treasury sales amid a flood of issuance since 2009 to finance bail-outs and fiscal spending orgies.

The Fed has informed the markets that at some stage it will begin to withdraw these and other unorthodox monetary operations as credit markets have normalized and economic growth recovers since falling off a cliff in Q4 2008. Indeed, this has already begun with the Fed exiting the commercial paper market late last year and hinting it will end its purchases of Treasury bonds in 2010.

The Fed has created a deep chain of inter-dependence since the financial crisis erupted 18 months ago whereby any hasty withdrawal from supporting mortgage-backed securities might tip the economy back into recession. Credit intermediation, particularly as it pertains to mortgage-financing, remains heavily impaired; without government support, Fannie and Freddie would collapse and mortgage financing would almost disappear.

It's also worth noting that financial sector securitization markets are only a fraction of what they were compared to two years ago. This gaping hole in credit intermediation won't be resurrected any time soon. Moreover, consumer installment debt continues to shrink, loan demand remains anemic and consumers are still reducing, not increasing, net debt levels as the savings rate rises since 2008.

The above is not the prerequisite for monetary tightening – especially in the absence of employment growth. In fact, it's probably supportive of an extended period of easy money, resulting in some sort of monetary overshoot and, of course, its consequence: inflation.

The case for gold, therefore, remains compelling in the face of a massive credit overshoot likely to emerge in the United States. I'm pretty convinced the Fed is desperate to grow inflation at any cost in order to defeat deflation in housing, domestic consumption, wages and employment. And some sort of bungled policy response is bound to occur in the near future as the Fed tries to appease bond markets should interest rates at the long end rise, threatening a recovery.

Banks have started to lend since late 2009, albeit in small doses. Commercial bank credit has declined 2.6% year-over-year (through December), a level that is moderating compared to six months prior. At some point, banks will start to lend again. As loan demand grows the odds favor a serious credit overshoot as the money-supply eventually expands aggressively – causing inflation. Hedge fund managers John Paulson and Paul Tudor Jones subscribe to this view as does financial writer extraordinaire, Rick Russell.

Withdrawing extraordinary monetary stimulus without causing a financial dislocation in the markets is a bold task confronting western central banks. I have very little confidence that central banks will drain the liquidity spigots ahead of inflation, which they are so desperate to grow.

To bet against gold is to bet that central banks will "get it right." The odds of that happening are next to nil.

My view remains that gold is now in another series of corrections since the bull market began 11 years ago at $252 an ounce. The global exchange rate mechanism is flawed, wrought with enormous uncertainties and governed by individuals that don't give a damn about our purchasing power vis-à-vis profligate spending. I have more faith in gold than the Fed, the ECB or The Bank of Japan – a bunch of drunks at the bar with no sense of monetary responsibility or financial integrity. I remain more bullish than ever on gold.