As the Dow Jones Industrial Average plowed its way to a gut-wrenching 512-point collapse Thursday, thousands of Fools came together in a live chat session to assess the damage. The number of questions relating to gold and silver suggests that Fools sought to refocus their outlooks for precious metals after witnessing the widespread carnage. This article will seek to pick-up the scattered puzzle pieces and fit them all back together.

Picking up the pieces
Before we complete the puzzle to yield a clear outlook for gold and silver, we need to gaze at the pieces and study their contours. This week has witnessed an array of powerful developments with widespread implications for currency markets, which of course have direct bearing on the monetary metals gold and silver.

I've documented a continuum of developments over the past several years that have collectively formed the fundamental pillars for this secular bull market in precious metals, and this week saw the addition of a pathetically weak attempt to dial back projected spending increases in the U.S., further European debt contagion placing the large economies of Spain and Italy in the crosshairs, revelations of meaningful gold purchases by emerging-market central banks, and currency interventions by both Switzerland and Japan in the latest chapter of the global "race to debase."

That latter point is critical to understanding the resiliently bullish outlook for gold and silver. One might say it's the primary puzzle piece around which all others are arranged. You see, the still-deepening structural imbalance within the world's leading reserve currency (the U.S. dollar), together with the acute debt distress across the Atlantic blazing a similar trail for the euro, simultaneously herald the unavoidable devaluation of those two major currencies. Also, these conditions are, in turn, effectively forcing nations around the globe to engage in deliberate, competitive devaluation of their own currencies to defend their respective economic growth potential.

Marc Faber offered this explanation of the outlook for sustained U.S. dollar devaluation:

The trouble is that governments can default in two ways. Either they just stop paying the interest and there is a debt restructuring, like Argentina went through; or they just pay the interest and the principle eventually, in a worthless currency. That's the way the U.S. will likely do it.

Echoing a sentiment I expressed here back in March, Faber added, "Buying Treasuries as a safe haven is no longer a smart play".

Since currency valuations are all relative measures against other currencies, devaluation of the major reserve currencies can cause unwelcome appreciation elsewhere. Capital that had flowed into the Japanese yen or the Swiss franc in search of relative strength was forcibly evicted this week through intervention. Every time those dynamics play out, the resurgent role of gold as the sole currency immune to such antics is elevated within the global financial system.

Stepping back from the completed puzzle
When you combine all the myriad factors impacting gold and silver prices to yield a cohesive and carefully prepared image, the result is a decidedly bullish outlook that I believe will make my $2,000 target price for gold look Foolishly conservative before all is said and done. Over time, I believe gold will come to be viewed as a greater safe haven than U.S. Treasuries and cash, given the unfortunate outlook for continued dollar devaluation and currency-driven stagflation. For now, those imperfect targets for capital that's fleeing risk remain the knee-jerk default for many money managers. In the near-term, then, I see the potential for counter-intuitive demand for U.S. Treasuries and sustained flows into cash, and recent gains by gold and silver make them an enticing target for liquidation. Furthermore, Europe's acute predicament is likely to weigh heavily on that currency for a time, creating the potential for a countercyclical rally for the dollar.

Moreover, gold and silver suffered some technical damage on heavy volume Thursday that must not be overlooked. The metals had already recorded powerful upward moves during the preceding weeks, prompting me to suggest to readers of my blog last week that raising some cash might make some sense. When indiscriminate selling takes hold of investors worldwide, technical indicators can become our best guide. I see some light support beneath gold near the $1,620 range, but if that were to fail I think we could see prices dip toward powerful support near $1,480. Silver, as usual, could be expected to experience larger swings on a percentage basis.

Far from attempting to time or predict a near-term bottom, I simply use those technical levels to inform my repeated efforts to buy into weakness after selling into strength. All the while, my core positions in gold and silver remain untouched because these near-term dynamics can easily be overridden by any number of potential developments on the macroeconomic stage. In a long-term bull market like the one ongoing for silver and gold, the trend is most definitely your friend.

The near-term picture grows far more compelling when we examine the shares of gold and silver miners, which incidentally are where I focus the vast majority of my own investment exposure to gold and silver. Along with every sector under the sun, these mining shares were blasted back into oblivion by the market's indiscriminate dash for cash. During late June, while gold hovered just above $1,500 per ounce, I remarked that gold stocks on the whole were priced about where I would expect them to be if gold were fetching only $1,250 per ounce. Presently, even with gold holding above $1,650 per ounce, Fools will find Freeport-McMoRan Copper & Gold (NYS: FCX) trading lower still! If Goldcorp (NYS: GG) was a gift under $50, it became an even greater gift near $45 Friday morning before an analyst upgrade crossed the wires. Yamana Gold (NYS: AUY) is sporting a different sort of attraction, having weathered the sell-off with remarkable relative strength to hold above $13 per share. Once the near-term tide shifts back in favor of gold and silver equities, I expect this long-undervalued stock to prove a valuable outperformer.

As typically occurs during bouts of weakness for precious metals, silver miners bear the brunt of the selling to create some of the most enticing buying opportunities. Silver Wheaton (NYS: SLW) enters deep bargain territory every time its share price dips beneath the prevailing long-term price for silver. Endeavour Silver (NYS: EXK) continues to impress, Hecla Mining's (NYS: HL) deep discount to fair value defies explanation, and Alexco Resource (ASE: AXU) remains one of my top picks for the "poor man's gold".

After completing a puzzle, I like to step back a bit to appreciate the whole picture. Zooming out from the potential for further near-term weakness, I predict a long-term continuation of the trend whereby gold and silver are increasingly recognized as the most viable vehicles for protecting capital from the ravages of systemic currency distress and competitive global currency devaluation. Cash presents one alternative as a short-term parking spot for capital, but Bank of New York Mellon's incredible decision Thursday to charge fees to large cash depositors may nudge some of that capital in the direction of precious metals. U.S. Treasuries remain in high demand for now, but even the world's largest bond fund won't touch these highly unattractive assets with the negative realized yield. In the final analysis, the broader story for gold and silver is all about the resurgence of alternative, time-tested monetary instruments to step in as viable safe havens to an increasingly sour-tasting array of competing paper currencies and sovereign bonds. Because public debts continue to expand around the world, and paper currencies continue to devalue en masse, I believe the long-term upward trajectory for gold and silver remains etched in -- well -- metal.

At the time this article was published Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Alexco Resource, Endeavour Silver, Goldcorp, Hecla Mining, Silver Wheaton, and Yamana Gold. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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