Dear Reader,

As I write, gold has just experienced another steep upwards move and is trading at $1,192 an ounce. For the record, a year ago you could have bought the same ounce for $778. Doing the simple math, year-over-year gold has now risen 53%.

Emotionally, I‘m inclined to think that gold is running too far, too fast. That inclination is supported by considering that, over the same period, the dollar index (DXY:IND) has fallen by 14%. When it comes to first-world currencies, that’s a huge move.

Even so, that data point is suspect, because all it really tells us is that the dollar has fallen less against other fiat monies than it has against gold, the world’s only honest money. And against gold, the dollar has fallen… about 35%. (Think of it this way… each dollar could purchase 1/778 or 0.001285 ounces of gold last year and now can only purchase 1/1192 or 0.000839 ounces, which reflects a decline in the value of the dollar relative to gold of 34.7%.)

A move that screams big for the need to double check one’s premises about what’s next for gold. While Casey Research Chief Economist Bud Conrad tackles that topic in some detail in the soon-to-be-released December edition of The Casey Report (it’s not too late to snap up your three-month 100% money-back guaranteed trial subscription), I’d like to add my two cents to the discussion.

When I step back from the emotional reaction to gold’s stunning rise and look strictly at what’s actually going on in the world, I have to think that gold will go to at least $2,000 in this cycle. And there are very credible scenarios that Bud discusses in which it could go to a multiple of that number.

Why so bullish for the yellow metal? There are a number of reasons, but one in particular I’ll focus on today.

Interest rates.

At the peak of the last great U.S. inflation and corresponding gold bull run in the late 1970s, the government had a simple yet very effective tool to deal with the then prevailing problem of runaway inflation: aggressively raise interest rates, thereby contracting the money supply.

Once inflation was tamed, the Fed was then able to steadily reverse course by lowering interest rates, effectively rebooting the economy and setting the stage for a protracted bull market.

In the current scenario, with everyone and every government up to their eyeballs in debt and interest rates already near 50-year lows, the problems the economy faces are distinctly different. And far more intractable.

Simply, there is no conceivable way the government can raise rates without destroying what’s left of the economy. Besides, in the absence of price inflation, why would it want to? Quite the contrary, using the lack of price inflation as its cue, it is going to great lengths to keep rates low in order to encourage yet more spending and more debt.

I suppose the hope is that, over time, the Fed will be able to manage the inevitable rate increases so they occur very slowly. That mindset cements in the cheap-money policies for as far as the eye can see, or at least until – again, it hopes – debt levels fall to the point where an increase in interest rates won't be so devastating.

But there's the rub – because at the same time the U.S. government is pursuing some of the most aggressive easy-money policies in its history, it is simultaneously engaged in historic levels of deficit spending… as in year-over-year deficits more than 3X higher than any seen since WWII.

Thus, when interest rates ultimately start rising, they’ll be rising on an even larger pile of debt. Which, of course, the government will be even more anxious to avoid – because at that point they’ll only have one option: default on the debt. Either suddenly or over time, with an even more aggressive dollar debasement.

All of which is to say that we are now in a classic negative feedback loop that can only have one outcome – a lot more currency depreciation. But depreciation against what? Well, pretty much any tangible – but as far as money is concerned, it's gold that comes out the winner.

What about gold stocks in this scenario?

Gold stocks are always a tricky business, and we are already seeing a lot of stock promoters comparing their company valuations to those of others, claiming that their shares are relatively cheap by comparison. As our own Marin Katusa so correctly points out, there is no mention of actual value, just relative value – a red flag if there ever was one.

As investors in precious metals stocks – which offer a tremendous leverage to the metal prices, a leverage that will very much come into play as prices break higher still – it’s important to remember to sell stocks that have a big run up and recycle the funds back into the newer stories that have yet to make the big move. Of course, some stocks you’ll want to hold for the duration, but consider getting your initial investment off the table and, as the prices ratchet higher, diversifying that money into other assets.

On that last point, there is something I have mentioned before, but I want to mention it again and, in time, again.

While you and I may agree that gold has a long run ahead of it, no one on this planet can say with absolute certainty when the bull market will end. But we can say, because we’ve seen it before, what will happen when it ultimately does come to an end – as it will.

* You won’t be able to get your favorite coin or bullion dealer on the phone, because they won’t want to buy back your gold at almost any price.

* The volume in the smaller precious metals stocks will dry up, just as everyone is scrambling to unload. That’s a formula for huge losses… 90% or more in some cases.

* Because they are new and haven’t been “bear market tested,” we can’t say definitively what will happen to GLD and the other precious metals ETFs. Will the sponsors be able to send everyone back their money in exchange for gold that is falling like a rock? Perhaps. Perhaps not.

Don’t get me wrong. It’s fantastic to see one’s projections come true (even if they are, on the occasion, of the more dire sort). But it’s during the heady times that important turns in the road can be missed.

In other words, as attractive as the golden basket may be, don’t make the mistake of putting all your eggs in it. And when it comes time to sell, it will be far better to be early than to be late.

For now, however, enjoy the ride.