Will gold ever be worth $5,000 an ounce?

It is hardly controversial in gold circles these days to suggest that $700 is the next price target for the yellow metal.

Only in the past week the idea that $600 might prove an unsustainable level was ditched as an attempted sell-off failed and gold rapidly recovered to the mid-$600s. There are rumors that several hedge funds got their fingers burned badly last week by betting against gold.

So we seem to have $700 well and truly in sight, and gold will probably not take much more than a week or two to get there. However, the older heads in the industry can see a problem looming on the horizon: an oil price spike and a big correction on global capital markets.

Crisis point?

Forecasting the future, even a short way ahead, is always fraught with hazard. But with global stock markets at multi-year highs, it is pretty clear that all we are waiting for is for an accident to happen. It could be a military event in the Gulf, or rebels capturing Nigerian oil fields.

Then oil and gold prices will ascend a new peak with a flight to quality. The danger lies in the simultaneous worldwide sell-off of assets from shares to bonds and the need to cover positions. Initially this sell-off would not include gold but as things got progressively worse, and a downward spiral always does, then gold would not be immune.

Thus while gold could quickly spike to $700 or even $800 an ounce, or retest the former all-time high of $850, experienced analysts warn of a correction coming in the gold price itself.

How low would gold go? Again guessing the future is harzardous but a 50% correction from a price spike is not uncommon in markets, especially at a time of global market capital turmoil. That would leave buyers of gold at the top seriously out-of-pocket.

Safe haven

However, gold might well be the quickest asset to recover from such a crisis. First, there would still be funds that need to find a home and gold offers strong residual value and other defensive properties.

Secondly, the response of the US monetary authorities to such a financial crisis would almost certainly be the printing of money; and this would automatically enhance the value of gold as a quasi-currency with a fixed supply.

Under this scenario gold could start a very powerful rally indeed. To reach its previous 1980 value, with an adjustment for inflation since then, gold needs to be worth $3,200 an ounce, and remember that markets tend to overshoot on the upside, so $5,000 an ounce is not impossible.

So should gold investors just hang on? That is probably the wisest council as judging market moves and timing sales is notoriously difficult, and the upside in the medium to long-term looks excellent.