Gold: short-term dangers, medium-term riches?

The wise investor is therefore probably either a seller or holder of gold at this stage. In any bull market and gold certainly seems to be in a bull market, there are setbacks and consolidations. The problem is spotting the difference between a short-term correction and a true switch into a bear market.

It is to the fundamentals underpinning the gold market that we need to turn to appreciate why the yellow metal will rise still higher in the medium term, particular over the next one to two years as a timeframe.

The Arabian stock market crashes of recent months are but a harbinger of what will happen in global financial markets very shortly. Just as the Asian Financial Crisis of the late 1990s was followed by the dot-com crash, global capital markets are inflated beyond sustainable levels and will crash.

Crash protection

Soaring oil prices and high interest rates will be the immediate cause of this fall, spiked higher perhaps by problems in Iran or Nigeria. It does not take much with global stock market confidence so high to spook the market, and as investors in the Arabian stock markets have learned markets can crash even when economic fundamentals look strong.

In such a global capital market crisis gold will gain as a safe haven for investors. Gold is also a protection against the devaluation of the US dollar and inflation, both emerging themes of the investment world and likely to get much worse - just look at soaring commodity prices which are inflation in progress.

Gold is also a place for investors to go when they have nowhere else to hide. Money has to be kept somewhere, and if the US dollar is devaluing, stock markets are unstable and bond prices slump, just where else do you put your cash? Moreover, gold has a famously fixed supply, and as more and more investors turn to gold then a strong rise in the gold price is assured by the forces of supply and demand.

Undervaluation

At present all the gold stocks in the world are valued at less than half the value of Microsoft. Spot the undervalued asset class of the future. Gold stocks have a huge upside and are effectively leveraged against the price of gold itself.

Expect to see a boom in funds that invest in gold mining companies and gold futures. This is where the investment boom of the next couple of years will be concentrated, and those that make the move to gold soonest will do best.

Of course, this section of the market is presently under-researched and poorly served by the financial community. But the brightest investment managers will shortly announce gold funds.