John  Lee writes a brilliant article on the outlook for gold and gold stocks in 2008. Here are some of the main points from the article:

•  The dollar crisis relative to other fiat currencies may have reached a climax. This means   that the fall of the U.S. dollar index may be suspended, at least temporarily.
• With gold already more than having tripled from its low of $250 in dollar terms, the fundamental driver for gold in 2008 will likely come from the flight from other fiat currencies besides the dollar.
• While the XAU gold stock index has raced from 50 to 160 since 2001, it has failed to live up to the expectation to most investors, many of whom are looking for 10 baggers 70’s style.
• Indeed many gold explorers with defined resources declined so much in price that they are selling as if gold is back to $300.
• Those bearish sentiments are not typical of a top in gold and gold stocks. When projects and companies are being valued at a premium gold price to spot, then we know the peak is in place. There is a simple metric in measuring such premium: the XAU over Gold ratio. When the ratio is high, XAU is selling at a premium to Gold, and when the ratio is low, this means gold and gold stocks are both selling near the bottom. Today, the ratio sits very close to bottom.

Lee’s Conclusion:

With the collapse of the US mortgage debt markets, gold’s fundamentals have never been more bullish. The second bull phase will start as gold breaks out against all other fiat currencies”

Credit: Mau Capital and goldmau.com

We add:

Gold hasn’t outpaced the major stock indexes in 2007, despite being up 25% for the year, because of the absence of any real inflationary fears. That of course can change with oil threatening to trade above $100 per barrel in 2008 and a revaluation of the Chinese currency. Any signs of an increase in per unit costs for Chinese goods could send gold prices into a frenzy like we saw in the 70’s as compared to the major indexes. $1000 gold, you bet!

In addition, do not expect major lenders to rid themselves of the sub-prime mess which will put pressure on the Federal Reserve to keep interest rates low for 2008. Add in a bullish outlook for the Chinese economy in 2008 and all the factors for 2008 to be a golden year are intact.