Hold cash and wait for markets to settle, pay off debts, then buy gold!

There is another reason for the readers of this column to hold on to their Gulf currencies which have a fixed peg to the US dollar. And that is because the US dollar would likely gain in value if the global market sell-off picks up speed.

We saw this phenomenon last May, and we have seen the US dollar strengthen slightly against the euro and sterling in the past week or so, but not against the yen due to the unwinding of the carry trade.

This is a long delayed reaction to rising interest rates globally. The improved rate of return on cash should attract deposits away from equities where the dividends on stocks have reached record lows. For in the investment community the iron laws can not be broken, merely delayed a while.

Chart readings

Indeed, the US dollar looks at a cyclical low on the currency charts when you look back five years. It could go lower, though not by very much. On the other hand, equities have had a four-year upward run and are ripe for a cyclical downturn at least. The same can be said for real estate in many global markets, only perhaps more so.

Where does that leave gold as an alternative? Well, gold will not strengthen by much if the dollar improves. It may go down as it did over the past two weeks as global markets weakened.

However, the US dollar probably does have another final leg of weakness before it hits rock bottom, and any recovery in the US dollar during a renewed global market sell-off could be seen as a great buying opportunity for the yellow metal or its silver counterpart.

Golden opportunity?

For the Fed will almost certainly respond in horror to stock market weakness, cut interest rates sharply and flood the market with more US dollars. Excess supply of dollars equals more devaluation, and the gold supply will be one of the few fixed anchor points for investors at this stage.

On the other hand, holding US dollars or their equivalent makes good sense now as the current gold price could be dragged lower by further market mayhem. Debt being used to hold other assets that look vulnerable in a sell-off could also be usefully liquidated at this stage.

You only have to look at the unwinding of the US sub-prime loan market, employment figures, auto and retail sales and housing statistics to realize that a global market down-cycle has just started. And this sort of downturn lasts for a few years, not a few months, so take the cautious approach at this juncture.