Gold prices have drifted higher over the past few weeks and this week hit a 27-year high after the Fed cut interest rates. But gold bugs are nervous that in a big stock market downturn gold would be sold down alongside other assets by hedge funds and the like in need of cash to meet margin payments.
There are even those who think the US dollar would rally in a big sell-off, and gold and the dollar are inversely correlated so what is good for the dollar would be bad for the yellow metal.
However, the more sage investors in precious metals see this perhaps as the opportunity. Allow gold to tumble and the dollar recover, and then buy gold.
In a stock market crash it is pretty clear that gold might well be the first asset class to recover. Why? Well, the response of the central banks to a major market crisis would be to reduce interest rates again significantly and, one way or another, inject money into the system.
Gold's inevitable rise?
This would bail-out, or at least lessen considerably, a falling stock market. But the nasty side effect, and an unavoidable one, would be inflation and further dollar devaluation. Both evils are almost certainly going to be accompanied by a higher gold price.
The trick then is correctly timing the entry point for buying gold (and silver which has performed better than gold in previous financial crises). In a big sell-off the US dollar would likely revalue sharply upwards, as paper assets will be sold for paper currency, and the gold price could well take a tumble as hedge funds bail out to meet margin calls.
UK chart supremo Brian Marber, whose latest book is out next month, says gold could fall to around $560 an ounce from the current price of $724, and the US dollar surge in value. However, it is hard to imagine gold going much lower as this quasi-currency is a relative safe haven in financial turmoil with clear residual value.
How high for gold?
How high would gold then rise in the following three to five years is a matter of considerable conjecture. If we look to the latter part of the 1970s for a guide then gold turned sharply down in the financial crisis of 1975-6 and then powered upwards to a spike in 1980, delivering stellar returns at a time when every other asset class tanked.
It may well be that history repeats itself, more or less. But trying to precisely time an entry and exit point is difficult. Buying with cash and sitting tight for a long haul could well prove to be the most rewarding strategy, and possibly silver will again prove the better performer, albeit with higher volatility along the way.
Market old timers like Jim Sinclair, a very wealthy gold trader, think such patience will be extremely rewarding as gold prices could easily triple within this three to five year timeframe, and gold shares would do very much better being leveraged against the underlying price.