The market reacted strongly to the elevated debt crisis in Europe by liquidating positions in multiple asset classes. Gold fell 3 percent this week, losing its safe haven status as the dollar grew stronger and the 10-year government note headed lower.

Seasoned advisors know the markets usually overreact to negative news; they also are very aware of gold’s normal monthly historical volatility. Throughout the past 20 years of monthly returns, the precious metal generally increased only 0.5 percent in May, and has historically declined in June and July.

Facts don’t thwart the short-term pain, yet as contrarian investor Baron Rothschild said, “the time to buy is when there’s blood in the streets.” Here are the reasons we believe the sell-off sets up a buying opportunity for gold:

1. It is precisely the debt strangling the eurozone which will drive gold demand over the longer term. The side effect to the abundance of printing by central banks in the U.S., Europe, Japan and England is bloated balance sheets amounting to nearly $8 trillion. This is double the amount that it was only three and a half years ago.
2. Several developed markets have negative real interest rates and these rates are anticipated to remain negative for years to come. Historically, when rates fell below zero, gold prices rose.
3. Emerging market central banks, such as Mexico, Russia and Turkey, continued their gold buying spree in March. Central banks have begun accumulating gold reserves since the Federal Reserve cut interest rates in 2007, and HSBC Global Research expects this buying trend to continue for another five years.
4. In March, China shipped the third largest volume of gold in a decade from Hong Kong to the mainland, according to UBS Investment Research. With ongoing rising demand, China may overtake India this year as the world’s largest gold buyer.
5. India’s government abolished the excise duty on gold jewelry, which should encourage the restocking of gold and bring Indian gold buyers back to the market. UBS reported this morning that Indian buying on yesterday’s dip was nearly twice the average daily volume and the “strongest since April 17.”

In the past several months, an extreme divergence between gold and gold stocks has developed. The relative strength indicator of gold equities compared to gold now registers below the oversold signal of 30. Institutional Advisors found that over the past 100 years, there were only 4 other times that this has happened. To us, this means gold stocks represent a tremendous value buy. With the drivers above, as gold appreciates, we believe gold stocks will benefit.