Why gold is shining again

Over the past few weeks gold has staged a recovery to around $420 an ounce, having slipped below $400 during a preceding stock market rally. It took the terrorist atrocities of Madrid to send investors back into the yellow metal, and a renewed slide in the value of the US dollar.

Now a few stock market bears are on the prowl again, and commentators such as Dr Marc Faber see the markets making a major top between now and April. Thereafter energy price inflation - US gas prices are at a record high this week - will start to seep into general price inflation, and begin the upward ratchet of interest rates.

Stock markets decline when interest rates go up, unless the rate rise is in response to higher economic growth. And on some indicators US markets are 60% overvalued so there is plenty of room on the downside.

Falling stock markets and rising inflation, are good for gold. The fact is that you can not print more gold but you can print more money, so this makes gold inflation proof. Thus its value will rise against an inflating money supply.

A key point to watch for is when gold becomes detached from the US dollar - at the moment gold is shadowing the weakness of the greenback and its value is little changed over the year against the euro.

When gold begins to increase in value in euro terms then things should become really interesting and speculators will pile in. For the average investor it may be wise to acquire some gold shares, or gold depositary receipts in advance rather than to risk missing this investment cue.

Many experts believe gold will top $500 an ounce this year, and could go much higher. This contrasts with at best flat expectations for most major stock markets, with the exception of Japan; house prices which now worry the Bank of England; and a poor outlook for bonds post the US Presidential election.

One more reason to go for gold is that there is so little else to go for. Even holding cash is a major problem, as any US dollar saver will testify. So stash away a little yellow metal, but be prepared to liquidate this position if markets do crash as then there will be things worth buying.