Will Gold Hold Up as Stock Markets Turn Down?

 |  Includes: GLD, SLV
by: Peter Cooper

Gold prices have been remarkably resilient in the face of stock market volatility this week, although silver has weakened along with the industrial commodities and most notably oil.

It appears that gold is back to its traditional role as a safe haven. There was a new all-time high in terms of sterling, and of course the crash in the euro to $1.28 can only encourage euro zone investors that gold is a good buy.

Rally over?

The volatility of U.S. financial markets over the past couple of weeks, albeit with a notable bias to the downside over the past two trading sessions, is also leading to questions as to whether the long rally on Wall Street is now finally coming to an end. Volatility is often an indicator of a trend change with investors uncertain which way to jump, and jumping back and forth.

Only with the benefit of hindsight do commentators later say that the trend change was obviously overdue and ‘a healthy correction necessary’. Nothing is likely to be very different this time.

Except perhaps in the gold market. With bonds in the spotlight in Europe and a sovereign debt crisis in progress there is almost bound to be a move away from bonds as a safe haven and towards precious metals, or certainly gold; silver remains a more volatile and unpredictable fellow traveller.

On Wednesday the Dubai Gold and Commodities Exchange reported a 51 per cent surge in gold futures in the January to April period compared with the same months last year.

Oil price down

Oil prices, on the other hand, have dropped below $80. The euro zone crisis is boosting the U.S. dollar and this is depressing commodity prices across the board, except for gold.

What comes next is the big issue for gold bugs. Will a second major stock market sell-off revisit the lows of March 2009 and the autumn of 2008? If so, will that drag gold down as a part of a general sell-off with everything up for sale to meet margin calls?

One thing that can be fairly certain is that in relative terms gold will outperform most other major asset classes, but whether that will include cash in dollars or short-dated treasuries is perhaps unlikely.

Disclosure: Long gold, silver