More than 700% in less than three years… our readers have made quite a return… Shares of Seabridge Gold (SA) have soared 700% since I recommended it to subscribers of my Sjuggerud Confidential newsletter. That sounds pretty darn good… until you learn that we were up over 1,300% at their peak.

So what’s going on with gold and gold stocks? Why have they fallen so much? And should you be a buyer or a seller now?

Gold peaked in mid-March of this year – right when JPMorgan (and the Fed) bailed out Bear Stearns. That was the defining moment… the peak in fear in the U.S. And the dollar bottomed at the same time.

The price of gold has fallen from more than $1,000 to below $900. Gold stocks have performed much worse (as you would expect… gold stocks are “levered” plays on the price of gold). The AMEX Gold Bugs Index (an index of gold stocks, under the symbol HUI) stood at 520 in mid-March. It then fell below 400 just six weeks later.

If you’ve owned gold stocks during this time, you’re all too aware of the pain this fall has inflicted. What should you do?

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Let me ask a better question… Just when is the right time to be an owner of gold and gold stocks?

I first recommended buying gold in my True Wealth newsletter back in 2002. I found a way to buy it for $250 an ounce. My basic idea was this:

When is financial catastrophe insurance the cheapest? When you haven’t had a financial catastrophe in a very long time. Gold is financial catastrophe insurance.

Back in 2002, the dollar was extremely strong, and we had no fears whatsoever about our banking system. We hadn’t worried in 20 years. Now in 2008, we have the weakest dollar in recorded history, the worst credit crunch since the Great Depression, and our president has the worst approval rating ever.

The cost of financial catastrophe insurance has soared. Gold has gone from hated to “mainstream.” For that reason, I have actually just moved my gold picks to a “hold” in Sjuggerud Confidential for the first time. I told my subscribers “I think the huge profits in gold are behind us, and the peak in fear has passed.”

Importantly, THIS DOES NOT MEAN SELL. Here’s how I see it:

When I’m sizing up an investment, I look for three things: 1) cheap, 2) hated, 3) uptrend.

Right now, gold stocks are incredibly cheap. For example, Seabridge has 50 million ounces of gold resources in the ground… Here’s some simple math: 50 million ounces of gold, at $1,000 an ounce, is worth $50 billion. Oh, and I haven’t mentioned Seabridge’s 8.2 billion pounds of copper… Keeping the math simple again, 8 billion pounds at $4 a pound is $32 billion worth of copper.

So we’re talking $80 billion worth of metal in the ground. Now I realize it costs real money to get it out of the ground… but Seabridge is selling for $800 million – just 1% of the value of its metal in the ground.

And Seabridge has no debt, no operations really… and hardly any employees. So its “carrying cost” is negligible – about 5 cents per ounce a year, according to its most recent corporate presentation.

So gold stocks like Seabridge are very cheap. They’re also hated… Investors who just got into gold – only to get slammed – are running for the hills. Once again, we’re returning to a place where no one’s in gold but the diehard “gold bugs.” And they never give up…

In the 1970s, gold fell more than 50% a few times on its way from $35 to $850 an ounce. So to me, the recent fall in the price of gold (and gold stocks) is simply a normal correction in a gold bull market.

The long-term uptrend is intact… Gold has soared from $300 to $900. And the Gold Bugs Index is up from 40 in 2001 to over 400 today… I’d say that’s a long-term uptrend!

So I believe Seabridge is still worth holding. It’s making the right moves… It’s in the process of selling noncore properties and using the proceeds to buy back shares (this helps create a price floor for the stock). Seabridge is also moving its main project toward feasibility. These moves are dressing the company up to make it more enticing to a future buyer.

Other smaller gold companies are doing similar things.

I can’t know where and when the fall in gold and gold stocks will end. I do know that it can be very painful… Based on the experience of the 1970s, we should expect to see some major downward moves during the overall uptrend.

But I still think that gold stocks are cheap, gold investments in general are hated now, and the long-term uptrend is still here. I’d suggest buying back in at the first signs the short-term trend is back in the price of gold and the Gold Bugs Index.

Good investing,

Steve