My compliments to anyone reading this as it indicates that, Mayan predictions aside, the world has not ended; given the steady declines that have been seen in gold prices, we should have seen Dec. 21 coming as investors would have surely bought gold in preparation of the end of days.

Over the past three months, gold, as represented by the SPDR Gold Trust (GLD 0.34%), is down nearly 7%. Against the backdrop of Helicopter Ben and other major world banks firing up the printing presses, a weakening dollar, and the potential of the fiscal cliff sending the economy into another recession, you would think that prices would be rocketing higher rather than fizzling lower. Even as most expect a resolution to the fiscal cliff, considering the impact the situation will have on gold is a worthy exercise.

The fiscal cliff
The fiscal cliff involves a series of automatic tax hikes and spending cuts that are set to take effect in 2013 unless an agreement can be reached in Congress. The Congressional Budget Office, and most economists, has explained that an unfettered plunge over the cliff will cause a new recession that could lead to the loss of as many as 2 million jobs. The top three arenas in which the fiscal cliff fallout will shake things up are the pending debt ceiling issue, the expiration of various tax relief measures, and the first round of sequestration cuts.

In early January, a number of tax relief initiatives will expire. Included are the so-called Bush tax cuts and the end of both the payroll tax holiday and extended unemployment benefits. Sequestration cuts refer to mandatory cuts that are scheduled to take effect in 2013 as a sort of punishment for the inability of the two sides to negotiate agreed spending cuts in earlier talks.

Serving as an override to the entire situation is the reality that December brings with it the threat of the U.S. again hitting the debt ceiling. A year ago, when Congress last faced this issue, the economic consequences were serious, resulting in the first downgrade to U.S. debt ever. Given current balances and measures, the extraordinary measures power granted the Treasury to maintain U.S. debt is expected to run out early in 2013.

Thanks, Congress
If the economy is allowed to go over the fiscal cliff, thus confirming that those is Washington are more interested in their own agendas than the good of the nation, gold should be expected to rise. During periods of extreme economic hardship, like another recession, commodities, particularly precious metals, tend to be a good store of wealth. Additionally, given the reliance of so many nations on the U.S., another severe recession at home will likely have reverberations that traverse the globe. Gold is a particularly good insulator against country-specific risk.

The question under these circumstances becomes about how best to invest in gold. While physical gold has a certain appeal, there are large commissions and fees involved in buying and storing gold bullion or bars. The SPDR Gold Trust is a nice option because it provides access to the commodity without the need to navigate the size and complexity of the futures market. The ETF tracks the price of gold closely enough that there is little advantage for smaller investors to consider anything else when establishing smaller gold positions.

The final option is to invest directly in gold miners like Barrick Gold (GOLD 1.68%), Newmont Mining (NEM -0.03%) or Goldcorp (GG); the Market Vectors Gold Miners ETF (GDX 0.60%) provides diversified access to gold miners but allows for no customization within your portfolio. In this group, I like Barrick best based on its valuation, its position as the largest gold producer in the world, and the position of management. The company has been very clear that it intends to take a disciplined approach that abandons the growth-at-all-costs model and embraces shareholder value on a project by project basis. Currently Barrick carries a P/E multiple of 10, relative to 19 for Goldcorp and over 200 for Newmont. Even with this preference, it is global macro issues that are most likely to impact each of these companies.

A golden parachute
If, as is expected, the economy is rescued from the precipice, gold prices are likely to take a near-term hit. As things stand, this will simply be a continuation of the downward slide that has marked the last two months. In many ways – if you have any faith in Congress to act appropriately – waiting for the announcement of the deal as a catalyst to buy gold makes sense.

There are some subtleties here that are critical. If the resolution is a "kick the can down the road" cop out, the negative pall this may cast over U.S. debt is actually bullish for gold. On the other hand, if this year's holiday miracle is a resolution that actually solves some of the long-term debt problems without abruptly shocking the system, gold may parachute ever lower as the economy begins to recover. This last solution seems highly improbable, but one can hope.

The result, therefore, is that while it may be a bit too early to jump into gold, given the likely result when a resolution to the fiscal cliff is found, gold should have limited downside from here. The Fed has not slowed down its efforts to fan inflation to cheapen U.S. debt with our creditors – which is the non-euphemistic way of saying the Fed is fighting unemployment – and when inflation arrives, it should drive gold higher. While I am neutral to bearish in the short-term, for the longer-term, I believe gold continues to shine.