Prices of commodities flatlined between January 2024 and the start of 2026 – now they are rocketing. The S&P GSCI index of 24 major raw materials has surged 29% since 1 January. That reflects a heavy weighting towards energy, which accounts for more than half of the index's composition. Higher oil and gas costs will also feed through into agriculture prices, the index's second-biggest component. US wheat futures have risen 15%.

The Middle East isn't just a source of hydrocarbons, says The Economist: 22% of the world's traded urea (a fertiliser), one third of its helium and 45% of its sulphur (used as a plant nutrient) comes from the region. The Gulf is also a major source of petrochemicals required for everything from basic pharmaceuticals to glycol (a paint ingredient). With spring planting “imminent” in the northern hemisphere, a squeeze on fertiliser supply that lasts another few weeks risks “catastrophic” consequences for global harvests later this year.

Commodities rise sees industrial metals miss out

The commodities uplift has not carried over into metals, with the S&P GSCI Industrial Metals index flat since the start of the year. Aluminium prices have risen 8% since 1 January; the Middle East accounts for 9% of global production. But nickel has gone nowhere, while copper (down 4% this year) has been behaving like gold, suffering a pullback after a multi-year boom. The prospect of global stagflation doesn't bode well for the industrial demand that underpins metals markets.

Copper entered the year with “a dose of the metals fever” amid dire warnings that soaring demand for electricity will cause shortages, says Andy Home on Reuters. Yet while traders bet on copper shortages later this decade, current supplies are ample. In the US, Chicago Mercantile Exchange warehouse stocks have rocketed from 85,000 tons at the start of 2025 to 536,000 tons today (US stockpiling has been turbocharged by attempts to beat import tariffs). “The gap between speculators' great expectations” and the “current reality” of well-supplied warehouses “yawns ever wider”.

The structural metals story could yet come true, says Alan Livsey in the Financial Times. Sluggish prices between 2015 and 2022 prompted major global miners to cut spending on new mines by “at least a third” and focus on paying dividends instead. While investment started rising again in 2023, mines have very long lead times. The consequences of historic underinvestment will soon loom large. Real assets enjoy other attractions. They provide a hedge, both against bouts of inflation and a prolonged fall in the dollar, which presently appears somewhat overvalued. And at a time of AI-driven concentration risk, investors are eager to diversify into other themes. “Commodities tend to go through cycles,” says Evy Hambro of BlackRock. “We appear to be in the foothills of the next cycle.”

Why gold has lost its shine

Investors looking to gold for relief from the energy shock have been left disappointed. Gold has fallen 16% in dollar terms (and 15% in sterling) since hostilities began on 28 February. You would expect gold to do well at a time of war and inflationary pressure.

So why the pullback? Firstly, gold had already been on a record-breaking rally that saw it reach an all-time high in late January. Having rocketed 174% over the previous two years, the yellow metal entered the conflict looking overextended. Secondly, gold is strongly influenced by real interest rates (interest rates adjusted for inflation). While inflation looks poised to rise, so are interest rates, reducing gold’s appeal relative to competitors such as government bonds.

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As 2025 – the best year for gold price gains since 1979 – drew to a close, the question on the lips of everyone following the precious metal was whether the price would clear $5,000 per troy ounce during 2026.

Deutsche Bank analysts put out a report in November last year that suggested the price of gold would come agonisingly close, peaking at $4,950 during the course of the year. At the time, that felt optimistic, if not wildly so; gold closed at $4,163 on the day the report was published.

In the event, it took just 23 days of 2026 for the gold price to clear the high end of Deutsche Bank’s predicted range for the year. Gold then passed the $5,000 mark for the first time on the following trading day, 26 January – then, just three days later, it reached $5,500. Gold prices even briefly cleared the $5,600 mark on the morning of 29 January.

So while it would have sounded almost impossibly far-fetched a month ago, it now seems fair to ask whether gold might soon pass the $6,000 mark.

De-dollarisation and Iran tension boost gold

Two factors in particular drove the price of gold upwards during its dramatic surge on the week commencing 26 January: a weakening US dollar, and increased geopolitical tension particularly around a standoff between the US and Iran.

Gold tends to be priced in dollars. If the dollar loses purchasing power, it takes more of them to buy an ounce of gold; the price of gold rises. That’s why gold is often considered a hedge against inflation.

The US dollar index – which tracks the strength of the currency relative to a basket of other major global currencies (including the euro, the Japanese yen and sterling). It has fallen nearly 2% through 2026 to date, as of 29 January.

US president Donald Trump boosted gold prices on 27 January when he appeared to dismiss concerns over the currency’s slide, telling reporters that “the dollar’s doing great”.

Gold is also viewed as a hedge against geopolitical instability, and once again Trump has been at the centre of an upward ratchet on that front. The president has increased threats to attack Iran for the second time in his year-old second term, with the aircraft carrier the USS Abraham Lincoln having entered the Middle East region this week.

“US naval and air forces are building up in the Gulf as the US has ratcheted up threats on Iran,” said Susannah Streeter, chief investment strategist at Wealth Club. “President Trump has warned that the US is ready to act, if Tehran does not reach a nuclear agreement.”

Long term gold price drivers

While gold has made explosive moves early in 2026, this is only the most recent chapter of a long-standing bull run.

Over the last 12 months, the price of gold has more than doubled.

The initial catalyst for this rally was an increase in gold purchases from global central banks, particularly in the wake of Russian assets being frozen in response to Russia’s invasion of Ukraine.

“The rally has been striking, fuelled by bullish sell side views, sustained central bank buying, and a sense among investors that they remain under-allocated to the asset,” said Lousie Dudley, portfolio manager for global equities at Federated Hermes.

But Dudley warns that the rise could start to undermine the very appeal of gold that has made it sparkle.

“Some worry that gold is now drifting into the broader risk-on trade,” she said. Its rise in tandem with industrial metals raises “questions about whether gold is still acting as a reliable hedge in a risk-off environment”.

Even so, there is a strong case to be made for holding some gold in your portfolio. If you feel you are under-exposed, read our explainer on how to invest in gold.

Gold has risen more than 60% this year to over $4,300 per ounce. In doing so, it has transformed the outlook for the gold-mining industry after years plagued by post-pandemic supply chain snarl-ups, a lack of labour and the 2022 energy crisis.

Last quarter, gold producers generated roughly 50% more free cash flow than consensus estimates, notes Jim Luke, who runs Schroders ISF Global Gold among other funds. Importantly for investors, most companies are not rushing to spend this windfall.

Miners are still running their businesses using “conservative gold price assumptions” of around $2,500 to $2,800 per ounce, and letting cash build up on their balance sheets. In the first quarter of 2025, the sector moved from a net debt to a net cash position for the first time in more than 20 years.

Gold miners are deeply undervalued

As a result, gold miners now look deeply undervalued. Across the mining sector, the price/earnings (p/e) ratio has halved over the past decade, while the gold price has more than doubled, note Keith Watson and Robert Crayfourd, managers of the Golden Prospect Precious Metals (LSE: GPM) and CQS Natural Resources Growth and Income (LSE: CYN) investment trusts. “While there has been some recent performance, it’s not fully reflective of the current spot price, and that creates the opportunity.”

The big miners have now become cash cows, and analysts are struggling to catch up. Last week, Canaccord Genuity published a note on London-listed Fresnillo (LSE: FRES) for the second time in five weeks, revising its earnings targets higher by more than 70% for 2026.

“Our profitability profile for Fresnillo has moved faster than at any other time under our coverage,” they say. Two years ago, the firm’s capital spending commitments were consuming all of its operating cash flow. Today, cash flow exceeds spending by three times.

The cash influx is likely to lead to a rush in mergers and acquisitions (M&A) over the coming months and years. “It’s still cheaper to buy assets than to build them, and buying avoids the execution risk associated with development,” say Watson and Crayfourd. “We expect to see larger companies begin to focus on growth, which will create a bid for developers and smaller producers to be acquired.”

How to invest in gold miners

Funds that own a spread of larger miners, smaller producers and explorers could be the best way to capitalise on the sector. Golden Prospect is a pure play on precious metals, with roughly 85% in gold stocks. CQS Natural Resources has about 50% invested in precious metals miners, as this is where Watson and Crayfourd see the greatest value in the commodity space.

The BlackRock World Mining Trust (LSE: BRWM) and the open-ended BlackRock Gold and General Fund are both managed by the well-resourced Thematics and Sectors team at BlackRock, headed by mining-sector veteran Evy Hambro. As such, the investment trust team at Winterflood thinks these are some of the best ways to build exposure to the sector as a “one-stop shop” for investors looking for commodities exposure. Gold and General is a pure play, with almost 90% in gold and most of the balance in silver, while World Mining has 36% in gold.

There are also several other active funds that invest in gold and precious metals, as well as a growing number of passive exchange-traded funds (ETFs) that track various gold-mining benchmarks. The latter include Van Eck Gold Miners (LSE: GDGB) and L&G Gold Mining (LSE: AUCP). Both of these have done very well over the past year, but as the difference in returns – 83% versus 103% – shows, different funds and indices can have very different outcomes.

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Gold has always held economic value because of several qualities.

It is inert, which means it doesn’t decay (or irritate your skin if you wear it as jewellery). It is relatively soft, so it can easily be made into small units that can be exchanged.

But the quality that has made humans throughout history want to invest in gold is the fact that it is rare.

There is a finite amount of gold in the world. The World Gold Council estimates that around 216,265 tonnes have been mined in all human history, and that if all that was condensed into a single cube it would be roughly 22 metres long on each side.

Of course, there is more gold underground that could be mined, but the supply is finite. Or is it?

Scientists at ALICE – standing for A Large Ion Converter Experiment, which operates at CERN’s Large Hadron Collider (LHC) – published research earlier in May that quantified the conversion of lead atoms into gold.

Only 29 picograms of gold were produced – an almost unimaginably small quantity, “trillions of times less than would be required to make a piece of jewellery”, according to CERN. They also only existed for nanoseconds, before fragmenting into their constituent sub-atomic particles.

But, in essence, the ALICE team has achieved the stated goal of medieval alchemists: the conversion of base metals (particularly lead) into gold.

“At the current stage, it’s very economically unappealing, and not scaleable,” Hakan Kaya, senior portfolio manager at Neuberger Berman, tells MoneyWeek. “But at the end of the day, a lot of things, when you look at the history of economics or especially of commodities, that were considered uneconomical have over time become economical.”

What would turning lead into gold mean for gold prices?

The LHC is an eye-wateringly expensive piece of equipment. It took a decade and cost $4.75 billion just to build, and the cost of running experiments there runs to around $5.5 billion annually.

Its gold output, to date, is less than a trillionth of a gold ring that existed for less than a second.

So the breakthrough, while eye-catching, is not about to disrupt the gold investment case in its own right. The chances of it being scalable to any practical degree are miniscule, and it would likely take decades to develop the technology sufficiently if so.

But suppose for a moment that it was possible to scale this technology, and convert lead directly into gold.

“In that hypothetical, low-probability state of the world, there would be an impact on gold prices,” says Kaya. “Gold would be likely to be more abundant, and its scarcity value to a certain extent gets destroyed.”

He compares this to diamonds. When artificial diamonds became available, they dented diamond prices.

They didn’t completely kill them, though, and outside of industrial use cases (where artificial diamonds are often more effective than natural ones), Kaya points out that there is still something of a premium on “real” diamonds. The same might be true if gold were ever manufactured at scale.

The gold produced by ALICE was an isotope of gold, meaning it has a slightly different chemical composition to the gold that occurs naturally. While that may or may not affect its chemical properties, it would make it distinguishable from natural gold, and as such enable a premium on naturally-occurring gold.

“I would still think gold would continue to function as a store of value, even in that kind of environment,” says Kaya.

Alchemy and collectible gold

The thought experiment has all sorts of interesting connotations. Kaya suggests that “real” gold could become something of a collector’s item.

“There can be gazillions of Mona Lisa paintings out there, but it doesn’t reduce the value of the original. That cannot be replicated,” he says.

Similarly, if gold were ever produced from lead at scale, then perhaps items made from lead from before this was possible – such as gold bullion, or especially collectible gold coins – could take on even more lustre, standing out as relics in time from a bygone era.

“It may even increase the value that people ascribe to real, authentic gold,” says Kaya.

Massive technological advances would be needed in order for any of this to become more than conjecture. Kaya believes that there would be undoubted interest among the less risk-averse in investing into that research, at least in the longer-term.

In the here and now, though, there may be cheaper, more realistic means of increasing the gold supply.

“If you’re a gold miner, then maybe you just go out and explore mining gold from asteroids,” he says. “That’s probably within closer reach, and more economical [at this stage].”

I am not as much of a gold bug. I sympathise with many of the criticisms. It is not a productive asset. It does not generate an income. It incurs storage costs, so you can even say that it has a negative yield. We are not returning to a gold standard, so the idea that it represents sound money is wishful thinking. These arguments are all very logical.

Yet gold also has a long history as a trusted store of wealth and there are logical reasons for that as well. It’s rare and expensive to mine. It looks the part – this is a social judgement, but one that has lasted for thousands of years. It does not tarnish, rust or corrode. It is dense. It has few industrial uses, so its value is set by investment or jewellery demand (ie, wealth-related purposes). Other materials have some of these desirable traits, but gold combines them all.

So regardless of any persuasive case against gold, it is still seen as valuable by a large number of people and that’s ultimately what matters. You don’t need to be a gold bug to recognise that it behaves differently to other assets and there are solid reasons why that’s likely to continue for the foreseeable future, which means that it can have a very useful role in an investment portfolio.

Gold hits a new record high

Gold has certainly done very well for investors of late. The price has reached a record high in real (inflation-adjusted) terms, passing the record set in 1980. Yet this has been a surprisingly stealthy bull market: it would be an exaggeration to say that it’s gone unremarked, but there has been far less discussion about gold than during the big mid-to-late 2000s bull run. Even more surprising is that the amount of gold held by exchange traded funds (ETFs) – the most convenient way for most investors to hold gold – is lower than it was in 2020-2022, when the gold price perked up again after a few flat years.

This lack of curiosity is starting to change. Earlier this month, both Bloomberg and the Financial Times had lengthy articles about gold’s new highs. In truth, neither were very complimentary, implying that buyers are somewhere between mad and miserly. Gold bugs sometimes see this kind of commentary as a deliberate attempt to talk their favourite metal down, which is a stretch (the only asset that the investment industry is really desperate to discredit is cash because it earns nothing on cash savings, hence the incredibly misguided lobbying campaign to kill off the cash individual savings account (Isa) that the City is now waging). However, it reminds us that there is something about gold that makes many investors a little bit uncomfortable.

Perhaps it’s the nagging sense that gold is going up not because of a mania or a bubble (yet), but because the world is in a state of flux. In particular, a critical driver of demand has probably been the accumulation of gold reserves by central banks in emerging markets (eg, China), as they try to diversify away from the dollar. This still feels like a long-term trend. Any additional buying as gold comes out of the shadows – watch those ETF flows – would be a helpful extra boost.

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Gold price hit another record high on16 October, passing £2,060 an ounce, driving investors towards the yellow metal.

In particular, investors have been cashing in on gold they hold to take advantage of high prices, but are also stashing up on gold coins to take advantage of tax-saving opportunities.

Latest data from The Royal Mint shows a surge in demand for gold coins with a record quarter of bullion coin sales on its website - revenues increased 110% in the third quarter, July to September 2024.

Investors have also capitalised on record prices by selling bullion bars and DigiGold back to The Royal Mint, which resulted in revenues going up 86% and 91% respectively.

Ongoing geopolitical uncertainty, global volatility and falling interest rates contributed to gold prices rising in the third quarter, with the gold price in sterling now up 20% this year so far (as of 30 September). 

Investing in gold is often a popular, especially at times of uncertainty. Recent price rises saw gold bullion sales from The Royal Mint rising 63% year-on-year.

Why are gold bullion coins popular?

Bullion coins produced by The Royal Mint are classed as capital gains tax free investments and provide a tax-efficient way to invest in precious metals.

While Labour has said it does not plan to raise income tax, VAT or National Insurance, this has led to speculation that CGT could be in the firing line, hitting investor returns.

This has not only led to investors topping up their tax free allowances with ISAs and Sipps, but has also driven investors to tax efficient investments like gold coins. 

“UK investors are increasingly favouring CGT-exempt products, such as bullion coins. Sales of CGT-exempt bullion coins on The Royal Mint’s website have surged to a record high in the third quarter, with revenues up 110% compared to the same period last year. This has primarily been driven by a significant uplift in gold bullion coin sales. Between July and September 2024, revenues from silver and gold coin sales rose by 42% and 118% respectively, when compared to the same period in 2023. By contrast, sales of bullion bars, which are subject to Capital Gains Tax (CGT), have fallen, dropping by 11% year-on-year,” The Royal Mint stated.

Research from The Royal Mint also found that 44% of UK investors were considering investing in CGT-exempt bullion coins to boost wealth and reduce their tax bill.

Stuart O’Reilly, market insights manager at The Royal Mint said: “Gold prices have had multiple tailwinds in recent months. We have seen interest rates start to reverse course both sides of the Atlantic. Economic uncertainty and heightened geopolitical risk is leading to competition for safe haven assets. This is driving broadly positive market sentiment, fuelling both demand for precious metals, and activity from those looking to realise capital gains.

“Beneath the surface, the type of assets investors prefer is changing. While gold and silver can help investors strengthen and diversify their portfolio, our record quarter for bullion coin sales reflects the renewed focus on tax efficient investing. Our data suggests that investors are increasingly keen to protect their future investment gains, favouring CGT-exempt investments such as bullion coins over products that are subject to CGT. It’s also interesting to see more investors actively using The Royal Mint’s Buy Back Service, reflecting a proactive approach to closely monitoring the market and making strategic portfolio adjustments."

The gold-silver ratio has long been considered an important metric to gauge the best time to invest in precious metals.

If you monitor gold, you’ll know that the yellow metal is usually seen as a stable investment. The gold price had a glittering start to 2025, with investors flocking to the metal as a hedge against inflation.

Central banks are also buying up the commodity due to its diverse use in various industries like nanotechnology and cancer therapy.

Silver is traditionally more of a volatile investment, however, the ‘devil’s metal’ gained 21.5% last year and is up around 12% so far in 2025, leaving some investors wondering if now is a good time to invest in silver.

Whether you are new to precious metal investing or want to diversify your portfolio, it’s useful to know the relative value of silver against gold.

It can affect investor sentiment, help understand economic trends, offer a hedge against inflation, and influence your investment strategy.

What is the gold-silver ratio?

The gold-silver ratio compares the price of gold to the price of silver. Essentially, it tells you how many ounces of silver are needed to buy one ounce of gold and it is calculated by dividing the current market price of one ounce of gold by that of one ounce of silver.

The gold-silver ratio is the oldest tracked exchange rate that is still in use, and it is a guidepost for investment decisions, be it inflation, deflation, market crashes, and broader economic trends.

At the time of writing, gold was priced at £2,342.66 per ounce, and silver at £25.53 per ounce, so the gold-silver ratio was 92:1, according to UK bullion dealer Chards. Therefore, gold is currently 92 times more expensive than silver.

The higher the ratio, the more expensive gold is relative to silver. While there’s no definitive benchmark for the ratio, assessing the current gold-silver ratio against its average in recent years can be one factor that investors can use when making an assessment on when to buy or to swap holdings of either metal. Divide the current ratio by the average and you can calculate whether one metal looks too expensive or the other too cheap, based on average performance.

All-time gold-silver ratio

History of the gold-silver ratio

Gold and silver have been precious metals for a long time, and many may be surprised to know that the gold-silver ratio has been measured ever since ancient Roman times. The gold-silver ratio has evolved significantly over the centuries, due to changes in economic conditions, market dynamics and geopolitical events.

Long ago, the ratio between the two metals was set by governments and empires to control currency and coinage. The earliest record available dates back to around 3200 BCE, when ancient Egypt recorded a ratio as low as 2.5:1. The Roman civilisation was one of the earliest to set the ratio, which started at around 8:1, and over the decades, was bumped up to 12:1.

Since then, the value of gold has only risen, as the difficulty of mining and production of the two metals, notably gold, increased its scarcity value.

By the 18th century, most countries had moved away from using silver as common coinage and switched to gold alone. The US government's Coinage Act of 1792, which confirmed the dollar as the US standard currency unit also fixed the gold-silver ratio at 15:1. This ultimately resulted in gold being valued over silver, making the yellow metal more expensive, and causing gold coins to be hoarded and/or exported. The ratio was later adjusted to 16:1 in 1834.

By the 20th century, the ratio had already begun reaching dramatic heights of around 40 ounces of silver for one of gold, and even peaked at nearly 100:1 with the advent of World War II.

If the gold-silver ratio was still based on the availability of the natural supply of the metals it would stand at 15:1– estimates suggest there is roughly 15 times more silver in the Earth’s crust than gold.

But gold has been seen for years as a store of value, a hedge against inflation and the gap between gold and silver is ever mounting.

In April 2020, the gold-silver ratio reached a record 125:1, as a response to the onset of the Covid pandemic. Today, the ratio has dropped from those heights and is now sitting around 92 ounces of silver to one ounce of gold.

Related content

• Is now a good time to invest in gold?
• The mystery of America’s gold and why an audit matters
• How to buy gold bullion
• How to profit from the scramble for metals and minerals

Gold prices fell 7.1% in the month to 22 June, falling below $4,200 for the first time since March in the process.

Gold has sold off this year as inflation has risen, exacerbated by the conflict in the Middle East, prompting some to question whether gold still acts as an inflation hedge.

While gold is typically viewed as a safe haven during times of crisis, its gains during 2025 made gold holdings an obvious asset for liquidity-hit investors to sell once the conflict in Iran broke out at the end of February.

“Gold is often considered to be a haven in troubled times, but what many people don’t realise is that its price can still drop in a falling market,” said Dan Coatsworth, head of markets at AJ Bell. “Investors often sell what they can in the face of trouble, and gold is a liquid asset.”

But the selloff didn’t start or end with the conflict in Iran. Its price has continued to fall even as the war appears to be drawing to a conclusion.

“Recently, gold has become increasingly sensitive to the same oil-price and inflation dynamics affecting broader markets, meaning its behaviour may be more correlated with other assets than investors have come to expect,” Matt Bance, solutions strategist and portfolio manager at investment manager T. Rowe Price, told MoneyWeek.

What is currently weighing on the gold price, and where might it go from here?

Why is the gold price falling?

Several factors led to the price of gold falling after the US/Israeli war with Iran broke out, besides the aforementioned liquidity rush that set in at the start of the conflict.

Gold is priced in dollars, and had therefore been benefitting from a weaker dollar prior to the outbreak of the war.

Greater inflationary expectations also reduced the chances of central banks cutting interest rates. Hawkish central bank policy, particularly in the US, is typically negative for gold prices because higher rates increase the appeal of bonds compared to gold, which pays no income.

Either side of the war there has been much focus on the policy outlook of the Federal Reserve’s (Fed) new chair, Kevin Warsh.

Warsh is regarded as more hawkish (favouring relatively higher interest rates) than other contenders for the position. Gold prices fell immediately following his announcement as Trump’s pick for the post in January, and with US CPI inflation rising to 4.2% in May markets are expecting the Federal Open Market Committee (FOMC) (the Fed’s committee that sets interest rates – equivalent to the Bank of England’s Monetary Policy Committee) to slow or even reverse its prior cadence of rate cuts.

This was underscored following the FOMC’s first meeting under Warsh on 16 and 17 June, with minutes of the meeting indicating that FOMC members have revised their future interest rate projections upwards.

“The first FOMC meeting with Chair Warsh revealed no resistance to market pricing for hikes,” said Michael Hsueh, research analyst at Deutsche Bank, in a note seen by MoneyWeek. The minutes in fact “underlined potential for a further hawkish shift” from the committee, Hsueh added.

Should you buy gold?

A more hawkish Fed means that the short term outlook for gold isn’t particularly positive, and there are other reasons to believe that gold prices could fall further before they start to rise again.

“A significant portion of the structural bull case is now reflected in prices,” said T. Rowe Price’s Bance. “Central bank demand moderated in the first quarter of 2026, while exchange-traded fund (ETF) demand has also softened.”

Despite this many experts, Bance included, think there is still an argument for holding gold given its long-term diversification potential.

“While market dynamics reduce some of gold’s diversification appeal in the near term, we continue to believe gold deserves a place in diversified portfolios,” he said. “Gold provides diversification against inflation surprises, fiscal deterioration, reserve currency uncertainty, and broader confidence shocks. Those risks remain relevant, which is why we continue to favour maintaining a strategic allocation.”

How to gain exposure to gold prices

If you are considering where to invest and want to add some gold exposure, there are three main approaches.

The first one is investing in the metal itself through a financial contract, such as an ETF or exchange-traded commodity (ETC).

See our article on the best gold ETFs for more information.

You can also get indirect exposure by investing in the miners that dig gold out of the ground. This can be done by investing directly in their shares, or by buying a gold fund or investment trust.

Lastly, you can buy physical gold bars or gold coins.

In terms of how much gold to hold in a portfolio, Tom Stevenson, investment director at Fidelity International, suggests around 5-10% – which is about the same as you might hold in cash.

“The two offer insurance and dry powder to complement the growth and stability of the shares and bonds that make up the bulk of a balanced portfolio,” he said.

With a history stretching back to the dawn of civilisation, investing in gold is perhaps one of the most tried-and-tested economic transactions you can make.

It’s been a prosperous period for gold investors recently. Strong demand from various sources drove global gold prices to new all-time highs early in 2026.

The price of gold hit an all-time high of $5,595 on 29 January, having been driven upwards during the month by Trump’s intervention in Venezuela and rumours that the president was about to nominate a dovish chair of the Federal Reserve (Fed) to replace Jerome Powell.

In the end, Trump went with a more hawkish Fed chair pick. Gold prices were starting to decline, before falling rapidly from the beginning of March as the conflict in the Middle East prompted a rush for liquidity.

Gold outperformed the S&P 500 in 2025 for the second calendar year in a row, and despite recent falls, it is still up 11.8% so far in 2026 – compared to 1.6% for the S&P 500. If you are considering where to invest for 2026 then an allocation to gold may well be tempting.

“The case for gold as a core portfolio allocation continues to strengthen, particularly in the current environment of persistent inflation, elevated geopolitical tension and uncertain monetary policy,” said Cosmo Sturge, director, market strategy at precious metals fund manager Baker Steel.

There are various ways that you can add gold to your portfolio. These range from buying gold bullion to investing in a gold ETF.

“Physical gold, in the form of coins and bars, offers direct ownership with no counterparty risk, appealing to investors seeking tangible wealth preservation, albeit with storage and insurance costs,” said Sturge. “Physically backed gold ETFs provide a convenient and cost-efficient alternative, delivering exposure to the gold price without the practical challenges of holding bullion.”

We take a look at the pros and cons of each approach.

Gold investing for beginners

If you’re just getting started in investing, it’s worth considering the role that gold could play in your portfolio. It’s tempting to buy gold during a bull run like the one it enjoyed last year, but even when gold prices aren’t climbing there are good reasons to include an allocation in your portfolio.

“Gold can be a highly effective hedge against governments’ monetary and fiscal profligacy (monetary debasements and currency devaluations) and tends to become the ultimate safe haven when global geopolitical shocks start to occur,” says James Luke, manager of the Schroder ISF Global Gold Fund.

Traditionally, bonds are used to diversify a portfolio away from equities, the theory being that when bonds underperform, stocks overperform, and vice versa.

However, as Luke explains, bonds have shown a greater degree of correlation with equities in the current market. As such, gold currently offers a greater level of protection against a downturn in equities markets, given its lower degree of correlation.

Despite this, most investors are relatively underweight gold. “We absolutely believe gold deserves a place in investors’ portfolios,” says Luke. “In our view a traditional 60:40 portfolio would benefit from diversifying 10% into a gold allocation.”

How to invest in physical gold

One way to add gold to your portfolio is by buying physical gold in the form of gold bars and gold coins. And though it isn’t usually purchased for investment purposes, bear in mind that any gold jewellery you buy will store value in the same way that other gold investments will.

Physical gold can be purchased from government mints such as the UK’s Royal Mint, precious metal dealers such as Sharps Pixley or GoldCore, and jewellers.

It is an unregulated market so you should be careful to avoid scams. One way to protect yourself is to always check whether a dealer is part of the London Bullion Market Association (LBMA), which sets standards across the industry.

As with any investment, it is important to do your own research on prices. Gold dealers make their money by selling for more than the spot price and buying for less. The difference – or spread – will vary depending on the gold content and weight of the bullion, who you buy from, and current supply and demand.

Gold coins can have more value than bars as they may be rarer and are often viewed as collectables, known as numismatic coins. Some forms of gold coin are tax-exempt, as they are legal tender. That means you won’t incur capital gains tax (CGT) if you sell them for a profit.

As attractive as buying a gold bar or coin may be, you should also consider the cost of delivery, insurance and secure storage. One solution may be using an online investment service such as BullionVault, which lets you invest in gold bars or coins which are stored in its vaults.

The Royal Mint also has a digital option that lets you invest in physical gold, silver or platinum based on monetary value instead of weight. It can then be stored in the Royal Mint’s vault.

Investing in gold with ETFs and ETCs

A simpler and cheaper way to invest directly in gold is through exchange-traded funds (ETFs) – or to be precise, exchange-traded commodity (ETC) products.

Analysts typically favour physical-backed ETCs, such as iShares Physical Gold (LON:SGLN), over leverage-style products that rely on derivatives, adding extra complexity.

“An ETC owns physical gold and tracks the price,” says Ben Yearsley, investment director at Shore Financial Planning. “It’s as close as most people get as it’s simple and can be held in your SIPP and ISA.”

The main benefit of using ETCs to invest in gold, according to Paul Syms, head of EMEA ETF fixed income and commodity product management at Invesco, is their simplicity and cost-effectiveness.

“It’s low cost, and [an ETC] trades throughout the day,” he says.

You won’t actually own any gold directly – although The Royal Mint Responsibly Sourced Physical Gold ETC (LON:RMAP) allows investors to exchange shares for physical gold coins or bars.

Owning a gold ETF or ETC will allow you to benefit from any growth in prices. Of course, you will also lose money if the gold price drops.

Take a look at our article on the best gold ETFs for more information.

Investing in gold miners

Rather than buying actual gold, you could consider backing the companies involved in gold exploration or mining. This would mean buying shares in gold miners. This requires significantly more research than tracking the gold price, as a company’s success will be linked to its exploration activities, business strategy and management.

“While gold miners carry additional volatility versus physical gold, they can offer operational leverage to rising gold prices, as well as shareholder returns and exploration and development upside,” said Baker Steel’s Sturge. “Gold miners are currently benefitting from strong margins and are maintaining capital discipline, creating a potentially strong environment for performance.”

While investing in gold miners can come with greater reward, there is also the risk of incurring greater losses.

Investors should also pay attention to the size of the company, says Evangelos Assimakos, investment director at Rathbones Investment Management.

“Smaller companies will usually have a greater proportion of their operations in mines that have yet to start production and thus carry more execution risk should their plans get pushed further into the future or see a reduction in expected output,” he explains.

Rather than picking individual gold mining stocks – which can be more volatile compared to physical gold or gold price trackers, and therefore carry greater risk – you could select a fund consisting of gold miners. For example, the L&G Gold Mining UCITS ETF (LON:AUCP) tracks the Global Gold Miners Index, and as such holds companies like Agnico-Eagle Mines (LON:0R2J) and Newmont (LON:0R28).

The pros and cons of investing in gold

One drawback of investing in gold is the lack of income available from physical gold or through gold ETFs which don’t pay dividends.

What’s more, the price of gold can be volatile over the short or medium term, making it hard to know if you are buying at the top or bottom of the market.

However, advocates see the metal as a useful diversifier, as its value and performance don’t correlate with those of other assets. It also has a reputation for retaining its value well in periods of inflation.

“Gold’s role as a store of value and hedge against currency debasement has been reinforced in recent years, while its low correlation with general equities provides valuable diversification benefits,” said Sturge.

I thought today I would check in on some charts that I haven’t looked at in a very long time.

That is the Dow-gold ratio - the long-term ratio between the price of gold and the value of 30 of the most prominent companies in the US, aka the Dow Jones Industrial Average.

What is the purpose of this exercise?

Effectively, you are measuring stocks in money that hasn’t been debased. There are many who argue that the gold price is suppressed, but let us put such thoughts to one side and accept that, even if it has, gold’s value - its purchasing power - has preserved way better than the US dollar’s, or indeed any national currency.

In this instance, gold is a better unit of account, and the act of valuing stock prices in gold can tell you, quite quickly, which asset is cheap and which is expensive.

So here, courtesy of Nick Laird over at goldchartsrus, is the Dow-gold ratio since, get this, 1800.

A major change in the evolution of money

There is a lot to take in here.

The period from 1800 to 1913 is of considerable historical interest, but it is fairly irrelevant to use as investors. Gold was money in the 19th century and the US stock market was young.

Nevertheless we observe how the value of America’s companies grew incrementally over the course of that century, but in a relatively measured way. There was not the volatility that came with the post 1913 era of central banking.

When the black line is rising it means that stocks are rising in price, relative to gold.

220 years- Dow/Gold Ratio

Turning next to the post 1913 era. Nick has drawn a vertical red line at 1913 because that is when the US Federal Reserve Bank was formed. The following year the UK, France and Germany all abandoned their gold standards to print money to pay for World War One.

The period saw a major sea change in the evolution of money and banking.

You can see that there were three major highs - in 1929, in 1971 and in 2000. Again these were all years that saw major financial turning points. 1929 was the top of the stock market before the Great Crash. 1971 was the year President Nixon took the US off the gold standard. And 2000 was the year DotCom peaked while gold came to the end of a 20-year bear market.

Also notable are the years 1932 to 1933 - the low in stocks in the Great Depression and the time President Roosevelt confiscated Americans’ gold and then devalued the dollar.

And 1980 too. That was the year that the great gold bull market of the 1970s came to end. Gold spiked with the Iranian hostage crisis to $850/oz and, with Fed chief Paul Volker’s raising the Fed funds rate to 20%, the era of inflation came to an end and the stage was set for the next bull market in stocks.

Here is the last 120 years in close up.

120 Years - Dow/Gold Ratio

With the Dow today at 33,800 and gold at $1,790/oz it takes 19 ounces to buy the Dow. So gold is right in the middle of the range. It is neither expensive nor cheap. The same could be said of stocks.

There are many who argue that the Dow-gold ratio is going back to 1, as it did in 1980. That return could take many forms. There could be an extraordinary bull market in gold, inflation in the US dollar and stocks could simply remain flat. In such a scenario gold would have to go to $33,000/oz.

I don’t think that is going to happen, unless the US suddenly decides it is going to settle its debts with its gold and revalues the price upwards. Unlikely.

I suppose it’s possible that some deflationary panic, a war or a global pandemic, could send stocks tumbling by 50%, while gold itself goes up 10 times. Again unlikely. But these are the kind of scenarios we would need for that ratio to go back to 1.

I just don’t think it’s realistic. It might have been normal in the 19th century, but not today.

On the other hand, a runaway bull market in stocks could see the Dow double over the next three years while the world becomes even less interested in the analogue asset that is gold sending the price back to $1,300.

In that kind of scenario you would have a Dow-gold ratio at 50.

It would be above and beyond the green confidence band on the chart at extremities, but I have to say I would have thought a Dow-gold ratio at 50 is more likely than at one.

But based on the chart above, gold is probably a sell below 10 on the ratio.

Asset allocation for the next market cycle

Alternatively, here is the S&P 500-gold ratio.

With the S&P currently at 4,120 and gold at $1,790/oz that ratio currently stands at 2.3.

100 Years S&P 500/Gold Ratio

This a ratio that could easily go to one. If the S&P comes off a little bit, say 25% to 3,000 while gold has a big run to $3,000 - which is not such an impossible number - the S&P-gold ratio will hit one. It’s unlikely, but not impossible.

Similarly the S&P could go to 7,000 or more as gold falls to $1,500. Then you’ve got an S&P-gold ratio at 5. Not such an impossibility.

Stocks have been rising relative to gold since 2011, when gold last peaked. In the last three years they’ve wobbled a bit.

Where’s that one headed? One or five? Or do we stay where we are around 2?

It’s a big call. But it’s an important one to get right, as you allocate assets for the next cycle.

And if you happen to be in Edinburgh this week, please come and see my show How Heavy?, a lecture with funny bits about weights and measures. It’s running at the Fringe until Sunday. You can get tickets here.

The gold price has fallen, and miners have gone to the wall. But that spells opportunity for nimbler prospectors, says Edward Chancellor.

Gold bugs are depressed. They may dream of hyperinflation, but inflation expectations remain quiescent, despite trillions of dollars of money-printing by global central banks. The gold price has fallen more than 40% from its peak. The prospect of the Federal Reserve raising interest rates and the strong dollar are further headwinds for owners of the barbarous relic.

Still, those who own bullion or gold exchange-traded funds (ETFs) can take comfort from one fact: shareholders in gold companies have done even worse. Since 2011, a basket of gold mining tocks has fallen by more than 70% a much steeper decline than the precious metal has experienced. With the gold price closing in on $1,000 an ounce, many mines are unprofitable, and may have to close if gold falls further. Beleaguered mining share owners might be forgiven for throwing in the towel.

Yet something doesn't add up here. If a falling gold price is bad news for miners, then a bull market in gold should be good news for shareholders. But that hasn't been the case. While gold has lost some of its shine recently, the bullion price has more than doubled over the past decade. Yet over the same period, a basket of gold stocks (as measured by the S&P/TSX Global Gold index) has more than halved in price (see chart below). So if the bull market didn't help miners, coulda falling gold price actually benefitthem? This sounds counterintuitive.But an analysis of the "capital cycle" (which I'll explain shortly) for gold miners suggests that good times may be around the corner.

First, you have to understand what has gone wrong. Clearly, the fault doesn't lie with the gold price, which is still around four times higher than at the turn of the century, when then-Chancellor Gordon Brown, in all his wisdom, decided to off-load half of the Bank of England's holdings. Rather, the problem derives from the miners themselves. In October, John Hathaway of Tocqueville Asset Management gave a presentation at the Grant's Conference in New York, which would have depressed any attendant shareholders in gold stocks.

According to Hathaway, in the ten years to the end of 2014, the aggregate debt of the top ten gold producers climbed from $1bn to $41bn. Their number of common shares outstanding doubled. Yet the total gold production of these firms has risen by just 13% to 43 million ounces. This means that gold production on a per-share basis has declined by nearly half.It's an old saw that a mine is a hole in the ground with a liar next to it. But the recent crop of gold mine managers aren't so much liars as incompetents. They have blown billions on merger (M&A) activity.

For instance, Kinross wrote down more than 90% of the $6.1bn it paid for Red Back Mining back in August 2010. But when it comes to capital allocation among gold miners, Barrick Gold, the world's biggest producer, has to take the booby prize. Over the past three years, Barrick has announced $23bn in asset write-downs. Some comes from ill-conceived M&A, including a loss of $5bn on its 2011 takeover of Equinox Minerals.

Barrick blew a similar sum on a new development, Pascua-Lama, on the Chilean/Argentine border. This was initially conceived in 2004, with estimated build costs of $3bn. By November 2012, after many delays and unforeseen legal problems, the estimate had risen to $8.5bn. Less than a year later, Barrick suspended construction and took a multi-billion-dollar write-down without producing a single ounce of gold from the mine.

The root cause of the problem is that managements responded to the post-2000 surge in the gold price by chasing growth. Not only did they spend vast sums on M&A and opening new mines, they also drove up costs by extracting gold from poorer-quality mines what's known as "low-grading". As a result, the industry's average cash cost for extracting an ounce of gold went from around $300 in 2000 to nearly $1,200 by 2013. Long-suffering shareholders have seen little in the way of dividends, and gold miners as a whole generated negative cash flow all during one of the greatest gold bull markets ever.

Blame the capital cycle

It's tempting to see this debacle as sui generis somehow unique to precious-metals miners. But in fact, the gold miners have simply experienced a classic "capital cycle", similar to those seen in many other industries in recent years. Since 2000, we've witnessed huge over-investment in many sectors: technology and telecoms stocks during the dotcom bubble, and more recently, capital cycles in American and Irish homebuilders, shipbuilding, US shale gas, energy, basic materials, semiconductors, and so forth.

Every capital cycle is somewhat different, but they have certain features in common. During the cyclical upturn, when sales are rising and profitability elevated, investors get overexcited about future prospects. So companies invest heavily for growth. Often all of the extra cash flow generated by the boom goes on capital spending. In the global mining industry, for instance, there has been a near-perfect correlation between the rise in commodity prices and the increase in capital expenditure, which rose around fivefold between 2005 and 2015.

The capital cycle

Capital cycle analysis can be boiled down to the following key tenets:

1. Capital cycle analysis can be boileddown to the following key tenets:
2. Changes in supply drive industryprofitability
3. Demand forecasts are more proneto error than supply forecasts
4. Yet investors devote more time toconsidering demand than supply
5. As a result, share prices often failto anticipate changing profitability
6. The value/growth dichotomyis false: differences in firm andindustry asset growth is key
7. Management's capital allocationskills are paramount
8. Meetings with management oftenprovide valuable insights
9. Investment bankers facilitatethe capital cycle, largely to thedetriment of investors
10. Policymakers influence the capitalcycle, largely to the detriment ofinvestors
11. New technologies may disruptthe normal operation of the capitalcycle
12. Generalists are more able toadopt the "outside view" necessaryfor capital cycle analysis
13. Long-term investors are bettersuited to applying the capitalcycle approach

Upturns in the capital cycle end, sooner or later. This nearly always takes investors by surprise. As a result, shareholders surrender much or, in the case of owners of gold miners, all of the excess returns they enjoyed during the boom. To avoid these pitfalls, Marathon Asset Management, a London-based fund manager with some $50bn of assets under management and an excellent 25-year track record, has developed what it calls the capital cycle approach to investment. I have edited a collection of Marathon's reports on the capital cycle into a book, Capital Returns.

The most important tenet of the capital cycle approach (you can read all 12 at the bottom) is that investors should spend less time trying to forecast demand. Who knows how many cars the Chinese will be driving in ten years' time? Instead, investors should focus on supply, changes in which are much easier to predict. Changes in supply and competitive conditions drive industry profitability. Yet stock prices often fail to anticipate shifts in the supply side.

Overinvestment can produce devastating losses for shareholders. Take the case of global shipping. Between 2004 and 2009, a period when shipping rates were rising, the global dry bulk fleet doubled in size. When the financial crisis hit, this new supply contributed to a 90% fall in daily rates. Due to long delivery periods, large numbers of new ships continued to be delivered for years after the collapse. Shares in dry bulk shipping companies were hammered as a result.

Capital cycle investors also tend to be suspicious of investment bankers. After all, the job of bankers is to raise capital, for which they earn handsome fees. They don't care about the long-term outcome for shareholders. A dangerous phase in an industry's capital cycle is generally marked by high levels of M&A and public listings (IPOs).

Brokers, too, act as cheerleaders during the capital-raising frenzy. Their industry analysts are often too close to management in the companies they cover and they get swept up in the excitement of the boom, taking what behavioural psychologist and Nobel laureate Daniel Kahneman calls the "inside view". Investment cycles take a long time to play out. Any analyst who calls a top too early is likely to be shown the door. This means the capital cycle approach can only be applied successfully by investors with long time horizons.

Besides short-termism, there are a number of other behavioural explanations as to why the capital cycle is overlooked. Most investors and corporate executives are infatuated with growth. Yet recent academic research suggests that the poor returns of growth stocks (ie, firms with high valuations) and the excess returns of value stocks (ie, companies with low valuations) can largely be explained by differences in capital spending and asset growth.

Andrew Lapthorne, Societe Generale's quantitative strategist, has run the numbers. Lapthorne finds that over the course of this century the stocks with the lowest asset growth (those in the bottom decile) have delivered nearly twice the average annual return of those with the highest asset growth (those in the top decile). The problem is that investors love growth, because they extrapolate present conditions into the future they think linearly. Yet we live in a cyclical world, where mean-reversion the tendency for valuations to return to a long-run average is driven by capital spending, and excess returns in most industries are competed away.

It's time to buy the miners

The capital cycle investment approach is inherently contrarian. It not only provides a framework for avoiding investments in sectors that have been on spending binges, but also points to bargains in distressed industries. With this in mind, it's worth taking another look at the gold miners. It's true that their recent history of capital allocation has been dreadful. But things have started to change for the better.

New management teams have replaced the accident-prone incumbents at several of the leading firms, including Newmont, Barrick Gold and Newcrest Mining. Growth is out of fashion. Instead, management at firms such as Newcrest, whose new CEO doesn't even come from the mining industry, are focusing on cash generation. Executive compensation for gold miners is increasingly linked to shareholder value and returns on capital.

Overinvestment generally takes place when firms trade at a premium to replacement cost. After all, if holes in the ground cost $10 to dig but are valued in the market at $20, there's a strong incentive to dig more of them. But when those holes are only valued at $5, then the digging usually stops. Gold mining firms have reached this point. Their shares are generally valued at below tangible book value. As Tocqueville's Hathaway observes, it's now cheaper to increase gold production by acquiring another miner than by opening a new mine.

Capital spending is being cut across the board. The weak gold price works to the advantage of low-cost producers, such as Goldcorp and Newcrest, since unprofitable mining firms are being forced to shut down. It has also reduced the supply of scrap coming onto the gold market. Meanwhile, the strong dollar is bringing down mining costs in foreign countries. Mining equipment costs are falling. These factors have enabled the more efficient producers to drive down the average cash cost of extracting an ounce of gold.

No one can tell what the demand for gold will be in years to come. Investors may be looking for a hedge as inflation returns, or not. Chinese gold consumption may soar, or not. But what's clear is that gold supply is set to shrink for the foreseeable future. And from a capital cycle perspective, the prospects for mining companies are looking brighter than for many years. Their investors should be cheering rather than cursing the weak gold price. Long may it continue falling!

Edward Chancellor is a financial historian, journalist and investment strategist. Capital Returns: Investing Through the Capital Cycle A Money Manager's Reports 2002-15 (Palgrave Macmillan) is out now, priced £24.99.

The best stocks and funds to buy now

If you're looking to invest in gold miners, consider these options, writes Alex Williams. Agnico Eagle Mines (Toronto: AEM), which operates in Canada, Finland and Mexico, brought five new mines into production between 2008 and 2010 and has been one of the best-performing gold stocks this year, up 20%.After some teething problems at its new mines (including a fire caused by a wolverine at its Meadowbank mine), the company is now over the worst of its capital spending commitments.

Production has nearly doubled in the last five years to1.8 million ounces, in turn helping to lower costs, which were $759 per ounce last quarter, down from $990 a year ago. Agnico one of the largest holdings in the Tocqueville Gold Fund, see below has maintained spending on exploration, leading to a major new discovery at Meadowbank. It has also capitalised on the falling gold price by buying 50% of the Malartic mine in northern Quebec, currently Canada's largest gold mine.

Randgold Resources (LSE: RRS) is another staple holding in the Tocqueville Gold Fund. The company builds and operateshigh-grade gold mines across west Africa. CEO Mark Bristow has doggedly stuck to his principle that "grade is king". As a result, he avoided chasing the marginal ounces that the rest of the industry raced after when gold prices were rising. Randgold now boasts some of the lowest operating costs in the industry, at below $700 per ounce. It also landed a highly accretive deal in September. AngloGold, which has been grappling with its $2.3bn debt load, has offered Randgold 50% of its Obuasi gold mine in Ghana in exchange for splitting the funding. "Gold is so cheap, it's being given away," says The Wall Street Journal.

Alternatively, gold funds offer much broader exposure togold miners, allowing investors to ride the long-term cycle, without fretting over "black swan" events specific to anyone mine. BlackRock Gold & General and the TocquevilleGold Fund are two of the biggest names in the sector. Both are down heavily since 2011, but if the gold mining industry is entering a capital spending sweet spot, the downtrend may have run its course.

How Dominic Frisby's October gold tips fared

Since my MoneyWeek piece on gold miners in early October, both gold and gold stocks saw a fast move up and even faster move down, writes Dominic Frisby. Gold has now hit my target of $1,050 an ounce. I'm not sure $1,000 will hold, but I'm expecting a rally in the short term. I'm encouraged by the miners. Despite gold's sell-off, most have held above their summer lows. Randgold (LSE: RRS) which my colleague Alex has also tipped (see above) remains my favourite "senior" producer. It's now at 4,070p. I have 5,000p as a target. Pan African Resources (Aim: PAF) has held above its summer lows. Producing 200,000 ounces of gold a year, and some platinum, and paying a 7% yield, the risk-reward trade-off is compelling.

As for the Canadian mid-caps, B2Gold (Toronto: BTO) I like below $1.50. But Lake Shore (Toronto: LSG) concerns me. It has slipped below its summer lows at $1, after announcing a fund-raising to explore a discovery it's made. A normal market would get excited about a discovery. Not this one. So there's a worrying downtrend at present. But I still think Goldcorp willbuy it. I mentioned a fondness for Aureus (Aim: AUE), which is trying to build a mine in Liberia. That fondness has gone.

I spoke to CEO David Reading in early October. We will be in commercial production "by 1 December at the latest", he told me. The day before 1 December there is no commercial production. Aureus announces a fund-raising. The stock is trading at 13p, the raise is at 5p. The stock halves. Another name on the already disgracefully long list of gold-miningCEOs who have said one thing and done something else.

First Mining Finance (Toronto: FF), on the other hand, is going great guns. The takeover of two firms, adding over six million ounces to the inventory, is done. Another takeover (of a cash shell trading at 60% of its cash value) has been announced. I predict this will be a billion-dollar firm, albeit the share count will probably double to get there. Finally, my lottery tickets tiny explorers and ideal take-out candidates. They're still there and still lottery tickets: Maritime (Toronto: MAE), Moneta Porcupine (Toronto: ME) and Gowest (Toronto: GWA).

2013 was a dire year for gold. It started the year at around $1,700 an ounce; by the end of June it had plunged to $1,200; after a late summer rally, it ended the year just a little above its low.

If you believe the City, worse is to come. Moody's is the latest firm to trash the metal, setting a price target of $1,100. Goldman is even more pessimistic, forecasting a drop to $1,050.

Now, we're happy to hang on to some gold as portfolio insurance. It's a great diversifier for your portfolio if things turn really bad. And if things keep improving and gold keeps going down well, the rest of your portfolio is doing well. That's the point of diversification.

That said, gold is so widely loathed at the moment that we can see various reasons why it might do better than most people think this year. And if that's the case, any rebound could be very good for the one asset class that is even more hated than gold gold miners.

The big name investors have been dumping gold

This is where investors particularly high profile ones who have been moving in the opposite direction to the market throw in the towel. The bears turn bullish, and vice versa. However, they usually change course at just the wrong moment because when the last bull turns bearish, there's no one left to sell the market.

For the gold market, the most high-profile buyer has probably been hedge fund titan John Paulson. In 2010 he launched a gold fund. Last year its value fell nearly two-thirds, from around $1bn to $370m.

Not only has Paulson rebranded' the fund (to be fair to him, his other funds were extremely successful last year), he has also advised investors not to put any more money into it. He also slashed his other gold holdings in 2013.

He's not the only one. George Soros and Daniel Loeb (who runs the $14bn Third Point Hedge Fund) have also sold their holdings in the main gold exchange-traded fund. These moves at least suggest that we have seen some sort of capitulation'.

The return of the eurozone crisis

But the ECB's promise 18 months ago, that it will do everything possible to save the euro, seems to have convinced markets that everything will be OK. Interest rates for the high-debt countries have fallen, and the euro has actually gone up in value even although the ECB hasn't actually done anything much.

However, this state of affairs may not last. Weak lending and monetary data suggest that there is a real risk of deflation inflation is at a multi-year low. That's enough to have any central banker feeling jittery.

Meanwhile, after several years of austerity and recession, anti-euro sentiment is reaching a critical mass. In France, the far-right Marine Le Pen has experienced a surge in popularity. In Italy, the disgraced Silvio Berlusconi is re-emerging as an anti-Brussels populist.

And, as Matthew Lynn recently pointed out, the fact that Greece is now running a trade surplus makes it easier for the stricken country to bring back the drachma (or at least threaten to). While a breakup isn't the most likely scenario, the ECB could be forced to turn on the printing presses, which would push up the value of gold.

Asian consumers might get the go ahead to buy more gold

Demand in India, meanwhile, was so strong last year that the government was forced to outline punitive import tariffs and export restrictions, because of its impact on the trade balance.

Before the measures, India's gold imports were only second to its oil imports. But while the measures reduced official imports, they also led to a huge amount of smuggling. It also created a backlash. And that suggests the restrictions will be lifted soon as India's economy improves. That's likely to provide a big boost to global demand for gold.

Gold miners are very cheap

One company that looks very interesting is Medusa Mining (LSE: MML), a gold producer in the Philippines. Unlike most of its rivals, it is a low-cost producer, meaning it should keep turning a profit, even if the gold price falls further. It trades on a price/earnings ratio of 7.3. And it trades at a premium of only 3% to its net assets, compared with the 50-100% premiums of firms such as Ashanti and Randgold.

Medusa is far from the only beaten-down gold mining stock. If you're interested in the sector, and cherry-picking possible bargains, you should take a look at what my colleague Simon Popple has to say about it.

Metals and Miners is a regulated product issued by Fleet Street Publications Ltd. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Past performance and forecasts are not a reliable indicator of future results. Please seek independent financial advice if necessary. Customer services: 0207 633 3600.

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I'm getting sick of the word bubble'

I'm not unduly worried about the gold price.

But when I saw it had dropped $40 yesterday from $1,700 an ounce to almost $1,660 in the space of just a few hours, I'll admit a concerned eyebrow was raised.

So I suppose a bit of hand-holding is in order today - even if it's only my own.

Gold may not see fresh highs for at least another year

Let me start by re-visiting my forecast of several months back. By my reckoning, we wouldn't see new highs in gold for at least another year, ie not before autumn 2012, if not later.

I based this forecast on a simple, repeating pattern that gold makes when it gets ahead of itself. In the chart below, you can see gold's action since 2001. It's plotted on a logarithmic chart, as the pattern is clearer that way. (A logarithmic chart measures percentage gain on the y-axis as opposed to an arithmetic chart which measures price. So on a logarithmic chart, a move from 200 to 400 looks the same as 400 to 800 and so on).

You can see what a lovely consistent ascent it's been.

But even within this steady uptrend there are times when it's got a little ahead of itself and then pulled back, as I've indicated in yellow on the chart. One example is in early 2003, another is in May 2006, another February 2008, and of course the same thing happened again in September 2011.

Each time it's done so, it's had a nasty fall, followed by a period of consolidation and digestion. And the more it's got ahead of itself, the bigger the fall and the longer the subsequent consolidation phase. I'm thinking in particular about the 18 months or so that followed the highs of May 2006 and February 2008.

On both occasions it was well over a year before gold made new highs. I believe we're in just such a period now. The high gold made last September at $1,920 was a typical example of gold going too far too fast. Now we have the consequent period of digestion.

So that's how I'm interpreting the big picture.

Gold measured in sterling is far less smooth

Out of interest, I present to you now the same chart, but of gold measured in pounds. The graceful ascendency is gone. This chart is hiccuping its way higher in steady, annual burps.

The inverse of this chart - which shows just how much the pound has fallen against gold - has the look of a geriatric stumbling blindly to his coffin.

The short-term outlook for gold

Now let's zoom in and take a look at the nearer term. Here is a one-year chart of gold.

My famed 144-day moving average (blue line) has now become resistance, unfortunately. I see good support in the $1,550 zone, where I have drawn the light blue band. And I see resistance at $1,800 where I have drawn the red band.

These will be, I suspect, the two lines in the sand for the time being, probably until the autumn. Of course, these are just guesses - I know no more than you.

But again, staring at the chart and guessing, I suggest a retest of at least $1,600 looks to be on the cards before gold's normal, upwardly-mobile business can resume. But such a re-test, should it occur, would give a nice symmetry to the chart and add to that decent-looking base at $1,550.

Could the miners finally start to outperform?

As for silver, I see a similar picture with strong support at $26, but resistance at $38. Silver does seem to be displaying some relative strength, which is positive.

Also on the positive side of things, I am seeing some buying coming in to the junior resource sector. This is probably because of broader stock market strength, but I'm hoping we're in the early stages ofone of those periods when the stocks outperform the metals. Not before time, that's all I can say.

I've just come back from the PDAC in Toronto, which is the world's biggest mining conference. I must have spoken to over a hundred different companies while I was there. I'll be publishing my notes from the conference, as well as my pick of the PDAC in a new report, so watch this space.

And, finally, I've banished my inner Luddite and signed up for Twitter. I have 136 subscribers so far, so plenty of room for upside. If you're on Twitter, please follow me @dominicfrisby.

This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

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As I mentioned last week, I may be buying a new house and I may have to sell some of my gold to do so.

I don't particularly want to, but needs must.

So today I am going to take a look at one of my favourite subjects - house prices, as measured in gold.

Why measure house prices in gold?

Every time I return to this topic, comments pop up questioning the validity of the exercise. You can't buy houses with gold, runs the argument, so what's the point of looking at the ratio of the two?

First, there are many who have wisely moved their wealth into gold to see out the current financial storm. They will move out of gold when they see relative value elsewhere. Hence the need to compare the price of gold to other markets.

Second, we are living in an age where money is being systematically, deliberately debased. This is not a conspiracy theory. The Bank of England is ignoring its stated duty, which is to keep inflation at 2%. Instead, it is issuing money out of nowhere and using it to buy bonds, in order to suppress long-term interest rates and 'kick-start' the economy. In other words, it is actually trying to create inflation.

In the case of the housing market, it hasn't kick-started anything. In fact, it's brought the market to a standstill. Savers and first-time buyers are left waiting on the sidelines for lower prices, watching their savings get eroded by inflation and in some cases, simply unable to secure a mortgage. Meanwhile debtors bask in the saver-subsidised cheap living provided by the Bank and its artificially low interest rates. Yet the Bank goes on printing.

If you look at the price of anything over the last 50 years - houses, food, energy, Western wages (not in real terms, but nominal) - you will see that it has gone up. This is down to our system of money - the supply of which is potentially limitless.

The only items where these endlessly rising prices are less evident are in items such as computers and clothing that have benefitted from mass production, improved technology, and cheap labour in emerging markets.

I prefer not to use something that is being debased as my unit of account. I prefer something finite, which is why I like gold. New gold supply roughly matches world population growth - that makes it a much more natural form of money, or more natural unit of account at least.

Yes, you could use Mars Bars, as one poster suggested in the past. But they do not have the weight of several thousand years of monetary history; they are less finite; and the data is harder to come by. So let's stick with gold.

The massive divide between London and the rest of the UK

First we look at UK house prices measured in gold. (My thanks to Professor Tom Fischer, of the University of Wuerzburg, for the chart). (click on any of the charts to see a bigger version)

In gold terms, UK housing has fallen by just over 78% from its high of 725 ounces in 2005 to 156 ounces in January. It is below its lows of the early 1990s, but has not yet reached its lows of the early 1980s or 1930s (50-100 ounces for the average UK house) - where, by the way, I am convinced it will be in a few years' time.

We all know however, that the housing markets of London and the rest of the UK are very different beasts.

Using land registry data (which we only have going back to 1995), Nick Laird of Sharelynx (www.sharelynx.com) has kindly put together a host of charts, showing the average price of houses in various UK regions and London boroughs measured in gold - and also silver. There isn't room for all of them here, unfortunately (subscribe to his site if you want to see them all), so I will just post a sample.

Picking a region at random, here is the north-east of England. The market is depressed here, and it takes less than 100 ounces of gold to buy the average house. Gold is well below its lows of the early 90s.

At the other end of the country, the south-west is a little stronger, but still well below the early 90s lows.

Now we look at London. Unlike the rest of the UK, which is down around 15%, London house prices have rallied back to close to the 2007 highs (certain boroughs are above them). Yet in gold terms they have actually fallen below the lows of the early 90s.

But boroughs such as Westminster and Kensington & Chelsea, which have been flooded by foreign money, are actually trading above 1995 levels, as measured in gold.

This also applies to the neighbouring 'trickle-down' boroughs, such as Wandsworth and Islington (see here for the relevant charts).

This huge gulf in performance between London's 'desirable' boroughs, which have risen, and the rest of the UK, which has fallen, exacerbates the ever-increasing rich-poor divide.

It's entirely a consequence the devaluation of the pound since 2007-8, which has made central London look cheap to overseas buyers. I thought the rich-poor divide was something policy-makers were supposed to be suppressing, not increasing.

Outside of London, I can actually see an argument for rolling out of gold and into property. It's not one that I agree with. I would wait, as I think we have further to fall. But property is no longer expensive in gold terms, as it was in, say, 2004-5.

What could bring London prices down?

But the flood of foreign money has meant that in London the falls have been less pronounced - in fact, measured in sterling there have been rises. Get out of London if you want to find value, is the simple answer. That's not possible for me.

If London property was purely a reflection of what Londoners could pay, then prices would be lower. But it isn't. What's going to stop the flood of foreign buyers for London property? A dramatic rise in the pound is one possibility. But a quick £50bn in quantitative easing has just killed that possibility, although the pound does look strong against the euro.

Another 2008-style collapse? Possible, but don't bank on it.

More likely is some change of legislation, a new tax maybe - a mansion tax, or a change in non-dom status, for example. I don't know. But, to my knowledge, there is nothing in the pipeline.

Which all brings me back to the argument of last week, which is to play the game that our glorious leaders want us to play and take on as much cheap debt as you can handle, and fix it for as long as possible as soon as you get a whiff of rising rates. It's a bet that's less about rising property prices and more a play on the continued devaluation of money - which, funnily enough, is the same bet as gold really.

If you do take on that level of debt, make sure you can comfortably service the interest, of course. And, hopefully, by the time it's finished appreciating, your gold will be worth more than enough to get rid of your mortgage.

I've had a slight reprieve from my landlord by the way - he's decided he doesn't want his place back until later in the year - so I've put off looking for the time being. But if I do eventually succumb and pay an exorbitant London price, a little piece of me will probably die inside.

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It's something that has wrong-footed and infuriated me in recent years. And it's a theme that I, and many others like me, keep coming back to.

I'm talking about the relative underperformance of gold miners versus the metal.

That is, gold has risen, but the miners haven't.

Why is this happening? And can we expect more of the same? Or will the tide finally turn in 2012?

Gold miners had a terrible 2011

The gold price started 2011 at $1,424 an ounce; it ended the year at $1,564. A typical - in the context of the last ten years - 10% annual rise.

The miners, on the other hand, haven't followed the script at all. The index of senior gold miners (the HUI), fell by 14% in 2011. The junior gold miners, as represented by the exchange-traded fund (ETF) GDXJ, fell 38%. And the gold explorers (GLDX) fell by nearly 50%.

Why has this happened? The theory is that if gold rises by 10%, gold miners should rise by even more: 15% to 20%, say. And the juniors and the lowly exploration companies should rise by still more, surely?

Yet with a few exceptions well-run companies, or those that have made big discoveries it hasn't been the case in recent years. Rather, gold stocks have only risen with gold if equity markets in general are rising too, or at least flat. If equities are tanking, as they did in 2011, gold stocks will too.

So why have the miners been so disappointing in recent years? Let's look back at previous crises and see if it casts any light on today.

Gold miners thrived in the 1930s

Two previous long-term economic contractions during which gold flourished include the 1930s and the 1970s. And in the 1930s, gold stocks did incredibly well too. Homestake, the leading US gold miner of the time, rose by some 600%. The company's big move came between 1932 and 1935 (from $2 to $6) but the Dow, too, was rising during this period. Homestake saw gentler gains between 1930 and 1932, a period when the Dow was falling.

But then, in 1933, it became illegal for Americans to own gold. Executive Order 6102, signed into existence on 5 April 1933, by US President Franklin D Roosevelt forbade the "hoarding of gold coin, gold b, and gold certificates within the continental United States" and required that citizens hand over their gold by 1 May.

So Homestake Mining and similar companies became one of the only ways Americans could buy gold, or at least an equivalent, and the stock benefited from this. On top of that, in 1934, the Gold Reserve Act saw gold revalued upwards from $20 to $35 an ounce. As a result, Homestake's profits ballooned.

These days, many people now blame gold ETFs for the failure of gold stocks to deliver. A majority of gold mining executives questioned for the 2012 Pricewaterhouse Coopers (PwC) Gold Price Report, said that while the high gold price was having a positive impact on their share price, it wasn't as significant as they'd have expected. Both the executives and gold analysts cited ETFs as the "main driver behind lagging share values".

You can see what they're getting at. ETFs such as GLD and PHAU have made it much easier to own gold. So they have attracted capital that might otherwise have gone into gold stocks. It means that gold investors don't have to take individual company risk or cope with the many problems that come with owning a gold stock: incompetent management, escalating costs, labour issues, geo-political issues, funding, stock dilution, geological or metallurgical difficulties. These ETFs now occupy the niche that Homestake enjoyed in the 1930s.

However, I don't entirely buy this complaint about ETFs. There are also ETFs that track the various gold mining sectors, so you don't ever have to take on individual company risk if you don't want to.

How did gold stocks do in the 1970s?

Below we see gold stocks in the 1970s, during gold's last bull market. This is the US Gold Index.

(Thanks, as always, to Nick Laird of Sharelynx.com for preparing the chart)

You can see that from 1973 to 1974, (at a time when the S&P 500 was falling), gold stocks rose. At that point, it was still illegal for Americans to own gold (that ended on 1 January 1975).

Gold stocks then went on to fall from mid-1975 to late 1978, before setting off on the mother of all bull market runs, which ended in 1980, along with gold's bull market. The S&P 500 was broadly flat during this period.

I certainly don't think the current bull market in gold is over just yet. In 1980 monetary policy suddenly became a lot tighter. We had interest rates over 15%. Paul Volcker was at the head of the Federal Reserve. We have no such fiscal discipline among central bankers today. And, interestingly, gold stocks - despite gold's fall - broke to new highs twice in the 1980s. So the gold mining sector should still have plenty of good times ahead of it.

What will it take to turn the gold miners around?

But what could get gold miners out of their current slump? The PwC report notes that the companies are trying to make themselves more attractive. Some are getting more creative with dividends - linking them to the gold price, paying out more frequently and, in some cases, actually paying in gold bullion.

That's good news. In a world simultaneously starved of cash, but awash with it, dividends are an attractive proposition. As I've long said, the strategy should be find the stuff, mine the stuff, make money, give it back to the shareholders. It's not rocket science. Companies that do that beat the market.

Plans to make acquisitions are also rising - 29% of respondents were planning to spend their cash on acquisitions this year. Perhaps we'll start to see the long-touted-but-never-realised frenzy of takeover and merger & acquisition activity in the junior sector. Here's hoping.

Obviously, certain strategies will suit some companies, but not others. It's up to management to make the right call. But company practice at all levels of the gold mining sector has to improve, otherwise they'll remain mired in 'dogsville'.

It is no longer enough to just be a gold company in a gold bull market there are plenty of other ways for investors to get access to gold now. The market is demanding something more. And investors should be looking to those companies where management is acknowledging this and trying to do something about it.

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The institutional gold price forecasts for the year ahead are finally in.

We have the London Bullion Market Association's (LBMA) annual forecasting competition, the Thomson Reuters GFMS annual gold survey, and the PriceWaterhouseCoopers 2012 Gold Price Report.

So let's take a look at what the professionals think gold is going to do in 2012.

The consensus for gold next year is 'gently bullish'

The LBMA's forecast is always entertaining: 26 'players' in the world of gold and silver predict a high, a low and an average price for the year.

The LBMA's forecasts tend towards the conservative. Unlike the wilder calls of independent newsletter-writers and commentators you find in the darker reaches of the web, these contestants mostly work for 'sensible' banks.

So rather than attention-seeking mavericks, we have 'backside-covering' company men. Their forecasts reflect that. And if there's one consistent trend I've noted in the years that I've been following these forecasts, it's that they usually underestimate how well gold is going to perform.

For example, in 2011, it outperformed the average price forecast by $115 (8% or so). The most bullish forecast was for a high of $1,850 from bullion dealer Ross Norman of Sharps Pixley. Gold went to $1,920 in the end.

It is usually one of the more bullish forecasts that wins. As often as not, it's Norman who comes out on top, although in 2011 first place went to Edel Tully of UBS, who correctly guessed the average price.

This year, Tully is the most bullish forecaster. He sees a high of $2,500, a low of $1,400 and an average price of $2,050. That's a pretty bumpy year. Ross, on the other hand, has a calmer outlook. He sees a high of $2,100, a low of $1,590 and an average price of $1,765. Gently bullish, in other words.

The most bearish forecast comes from Rohit Savant of CPM Group in New York. He sees a high of $1,800, a low of $1,200 and an average of $1,612.

The average forecast is for an average price of $1,766, which would be a 10% rise on the year, with a high of $2,055 and a low of $1,443. If this forecast repeats the typical excess conservatism we've seen in the past, we can expect an average price 8% or so higher than $1,766. That would be $1,907. I'll take that.

Forecasts are just forecasts, nothing more. You get the impression that while some might study charts and calculate average price moves over the last 15 years, others have just taken a stab in the dark on their way to the water cooler.

Looking at the Thomson Reuters GFMS survey, we see that global investment demand rose by 20% last year to $80bn. In the physical markets, purchases of gold bars rose by more than a third to almost 1,200 tonnes, with demand particularly strong in China, Germany, Switzerland and Austria.

The report predicts an average around today's price of $1,640 for the first half of 2012 and a push towards $2,000 in the second half.

What about the miners?

The PwC report focuses more on mining companies and their activities. Looking back at their predictions for 2011, the gold mining company executives just as with our men from the LBMA erred towards the conservative. Though one I wish I knew who said $3,000.

For 2012, just as with the LBMA, the highest prediction is $2,500, the lowest is $1,350 and most hover around $2,000. 80% of those asked see an increase, 14% expect current levels to be maintained, and 6% see a decrease. The average price that will be used for mine planning and budgeting is $1,420.

I'll have more on the PwC report in the future. It is very interesting reading about how executives are planning to deal with the relative underperformance of mining stocks versus the metal.

Gold won't hit a new high in the first half of 2012

So, the overall consensus is, I would say, gently bullish. This automatically makes me think 2012 will be anything but gentle. We'll see.

For now the issue with gold is that falling blue trend line I have drawn in the chart below. Until it can break out above that, it's not going anywhere. I see quite strong resistance $1,670-80 area. On the other hand, it seems to have a floor where I have drawn that green line in the $1,530 area.

This pattern is typical for gold after it has made an interim high, as the chart below shows. It happened in 2006 and again in 2008 and to a lesser extent in late 2009. It takes many months of consolidation over a year in 2006 and 2008 before it breaks out to new highs.

The steepness of the current pullback has me a little concerned. There's something a little '2008' about it though in percentage terms (you would see this on a log chart), the pullback is actually quite small.

So, I'm going to make the same 'mistake' as the chaps from the LBMA in my prediction, which also ties in with our man from Thomson Reuteurs, and err towards the conservative. I see a low for the year of $1,535. (We may already have had it in the last week of 2011, in fact.)

I see an average price of, say, $1,850, maybe a little higher. We'll inch higher as the year goes by and the price could make several assaults on $1,900 in the latter part of the year. But I don't see new highs in gold (above $1,920) until the second half of this year at the earliest in fact, probably not till 2013.

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Despite all the havoc in the eurozone recently, gold has been having a rough time of it. It fell 3% on Monday, and another 2% yesterday.

And now some are calling the top of the market.

My editor, John Stepek, has just sent me a Bloomberg article featuring US newsletter writer Dennis Gartman, who always seems to get let out when gold has a big sell-off.

He declares that "we have the beginnings of a real bear market, and the death of a bull".

So do we?

What were you doing during gold's last bear market?

Well, gold is up about 16% on the year so far. So no bear market there.

This compares with an S&P 500 which is ever so slightly down; a FTSE 100 that's down around 10%; a commodities index that's also down around 10%; a US bond market that's up about 17%; and a US dollar which is ever so slightly up.

If we use the definition that a bear market is a market that is down 20% from its highs, then Gartman may well be right. I don't say it will happen, but there is a very good chance that gold could fall more than 20% from its early September high of $1,920 an ounce.

This would be perfectly normal. Gold has had three 20% corrections since this bull market began in 2001. Once in 2006, again in 2008, and just three months ago in September yes, just three months ago. If you look at intra-day prices, it fell from a high on 6 September of $1,923 to a low on 26 September of $1,535. I make that 20%.

The problem is, when it made that low at about 9.15 am, if I remember rightly I was out walking the dog on Wandsworth Common. I'd just dropped the kids off at school, and now I had my dog ball thrower in one hand, iPhone in the other and was staring at the Kitco App, thinking "ooh, I should buy some silver". (Silver had fallen to $26).

Smartphone technology is wonderful. It makes many things possible. But this wasn't the ideal moment to be implementing these sorts of decisions even if I had previously sold at $1,920, which I hadn't.

By the time the US markets were opening, both gold and silver had already rallied. The former then closed the day above $1,600 and the latter above $30. The bear market was over. I'd pretty much missed it.

What were you doing during gold's last bear market? I was walking the dog.

If trading these market swings is your game, that's all fine and dandy. Myself, I just don't have the time or the mental discipline required for this kind of approach, full time. I have a trading portfolio, which I sometimes play with, yes. But I also have a much larger core holding which I don't touch. I have other things in my life I want to concentrate on.

So, first, I look at the fundamentals for gold. Have these changed? No. If anything they've intensified. I won't go on about them here save to say we are going through a generational monetary unravelling and in such a situation you want to own gold. You may well also need your metaphorical tins, guns and bomb shelters at some stage, but I do not have a buy signal on those just yet.

Then I like to look at a chart.

The 144-day moving average loses its magic

The wonderful 144-day moving average is back in the spotlight. This is the red line on the chart below, marking the average price of the previous 144 days. It has, since the crash lows of 2008, continuously caught the lows in gold. Why 144? Don't know. Ask Leonardo De Pisa. But it has worked brilliantly.

When I began writing this article, we were sitting right on it. I wrote,"these things don't work forever and I've an inkling it's not going to hold this time". Gold promptly fell through it.

For now, technically, the issue with gold is the trend line coming down off the September highs, which I have drawn in red on the chart below. However, coming up underneath and offering support we have the one-year moving average in green and that rising blue trend line.

The trouble with trading

As well as three 20% corrections, gold has had a further four 15% corrections since this bull market began in 2001. If you want to trade them, fine if you can do it. If you want to ride them out also fine. But if you do trade these swings, the risk is that you fail to buy back and you lose your position. Then, all you can do as gold rises is watch and declare that gold is a bubble.

In April-May 2006, gold suddenly launched from around $540 to $730. That was too much, too soon. Gold gave it back pretty quickly by late May, if I recall and spent the next 18 months consolidating and edging higher. It wasn't until October 2007 that we saw new highs.

From July 2007 to March 2008 gold went from $640 to $1,033. That was too much, too soon. By October 2008, it was back at $680. It wasn't until October 2009 that we saw new highs again a full 18 months after the first high.

My take on today's action is that we're seeing a similar pattern repeating. In July of this year, gold set off from $1,500 on a move that saw it $400 higher by September. Again, it was too much, too soon, and now we have the inevitable correction.

We can expect many more months of whipsawing, frustrating, consolidating action. I don't think we'll see new highs for a year or more. If these horrible markets get even more horrible, if fear and panic spread, if liquidity runs dry and nations serially default, we could easily sink to $1,500, to $1,250 - $1,000 even.

But gold could just as easily set off on one of its runs, which always seem to come when you're least expecting it, and hit $3,000 or $5,000.

So hang to your hats, my friends and your gold; trade in and out, if you're good at it don't if you're not. But your physical Don't let anyone near it, least of all yourself. In a few years time, you'll be very glad you didn't.

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That is, the underperformance of gold stocks relative to gold.

Or, to put it in layman's terms, gold has gone up, but gold stocks haven't.

What's that all about?

Gold stocks just haven't kept up with gold

The gold price hit a low of $250 an ounce in 1999, and then again in 2001. For the XAU the index of senior gold stocks the low was 42 in late 2000.

Now gold is trading at $1,720. That's nearly seven times higher. The XAU, however, is trading at about 205 only five times higher.

A five-fold increase may not seem that bad. But you buy gold stocks because they're meant to give you leverage over the gold price. If gold goes up 10%, gold stocks should go up 20% or 30%. That hasn't happened. So what's the point in buying them? You may as well just own the metal.

There are all sorts of reasons for this disappointing performance. But among the biggest is the complete failure by the managers of gold mining companies to grasp how good the fundamentals are for gold. It sounds ridiculous, but it's true. You'd think, being in the gold business, that they would have confidence in the final product, but many don't seem to.

Gold miners were scarred by the epic bear market

This was first apparent in the early part of the century. Many senior gold miners had only managed to survive the awful gold bear market of the previous 20 years by hedging their gold. Because they kept expecting prices to fall, every time gold rallied, the miners sold their production forward (ie they locked in a price for future delivery). If gold fell to $300 and a mining company had sold its gold forward at $500 - it looked pretty clever. And it's the right strategy for a bear market.

But the gold market turned a corner in 2001. So companies that sold their gold forward at, say, $400, only to see the gold price rally to $600 and higher, started to look pretty darn foolish. But, as is so often the case with large corporations, they were generally slow to react to this change.

Take Barrick. It's the world's largest gold producer. The company didn't end its hedging strategy which had served it so well during the bear market until late 2009, when gold was knocking on $1,200. What took them so long?

Juniors have been making big mistakes too

This failure to read the gold market extends across the junior sector too. From 2001 to 2007, it was easy to raise money. Exploration companies would issue shares, raise capital, go out and drill, hopefully declare something half decent, then go and raise some more money at a higher price.

Then we got the credit crunch, and funding dried up. Yet so many companies are still trying to follow this broken business model. They have been decimated this year. The only ones that have done well in 2011 are those that have mined metal at a low price, and sold it at a higher one. It really isn't rocket science. That's what gold miners are supposed to do. But often they don't.

I have long railed about this. The gold price is high, and the credit markets are dead. Gold won't be this high forever so mine the easy-to-get stuff and sell it while you can. Forget expanding the resource, or doing anything else just get mining. This market isn't interested in blue-sky stuff it isn't interested in dreams, it wants hard cash.

Even a mere 50,000 ounces of production per year which is considered small at a cost of $500 an ounce with a gold price of $1,500, means a profit of $50m a year. If your company has a market cap of $50m or $100 million, surely that's a no brainer?

Gold is leading mining stocks, rather than the other way around

In short, gold mining shares are supposed to lead the metal. But so many chief executives have been so slow to believe in higher gold prices and adjust their business models accordingly, that in fact it is gold that is leading the CEOs and by extension, the stocks.

I spent the day at the Mines and Money Conference in London yesterday, and there are signs that CEOs are finally starting to realise this. Instead of relying on capital markets, there's a lot of talk of small-scale production, even of paying dividends in gold.

I must have met 20 companies yesterday who have proven resources of more than a million ounces in the ground, at a late stage of development, good recovery rates, good metallurgy, cash in the bank, with a market cap that values their gold at $30, $40 or $50 an ounce in the ground. One company I spoke with has 1.1 million ounces and a market cap of $9m. That means its gold is valued at just under $9 per ounce in the ground.

So, to the sleepy, complacent bosses of gold majors, I say this: WAKE UP!

You are supposed to be the leaders, the trailblazers, the trendsetters. Many of you are sitting on huge piles of cash. Get your fingers out. Justify your huge salaries with some leadership. Just as the opportunity of the past five years has been to mine gold and sell it; now the opportunity for you is to buy these companies and start mining their gold too. Gold's going higher. Anyone can see that. Big discoveries are getting rarer. Take these companies out while you still can.

Given the evidence of the last 30 years, it could well be another five years at least before managements wake up and start smelling the coffee. But to gold mining investors, I say maintain your exposure to the sector, and stay patient. One day it will happen.

And just before I go, as a side note I quite like the look of Barrick's chart at the moment. It's tracing out a large, bullish cup-and-handle formation (more on that here)

I don't own stock and it is just a pattern, these things often don't work but as long as $42 holds, then if it breaks $55 mark the stock could move above $90 quite quickly. So keep an eye on it.

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I'm not sure we are going to see new highs in gold any time soon.

In fact, I'd wager some meaningless nickel coins that we've already seen the high for 2011. (The $1,923 an ounce level that was set in early September).

But I would also argue that we've seen the lows for the year as well.

After its summer excesses, which were duly chastened when gold fell almost $400 in a week, I would argue that gold is now stabilising nicely above $1,600.

And I suggest that, for those of you that don't have a position, now is a good time to get one.

What does gold normally do at this time of year?

Of course you could listen to the perma-bears, who have predicted as many as 17 of the last five corrections in gold, and decide that gold is in a bubble; that it has no use so what's the point?; that we're in deflation, so gold will fall; or write it off because it doesn't pay any interest.

That's fine by me. Go ahead. I will sit on my little pot of gold and occasionally taunt you. Or eat a large portion of humble pie, if you prove to be right. (Which you won't).

Meanwhile, for those who don't already have a position, or who are looking to increase an existing one, I think an opportunity to get long is about to present itself.

I like to use a mixture of fundamental analysis why would this market rise or fall? and technical analysis (TA). Too much reliance on either one does not suit me. I like to marry the two.

James McKeigue explains the best ways to buy gold coins and bars.

I know that gold is in a bull market. I know and understand the fundamental arguments for gold currency debasement, negative real rates, a banking crisis, monetary stress, a global debt horror fiasco, several thousand years of history and so on. So there are my fundamentals.

A lot of wiser heads than mine knock TA, but I like it. Once I have my fundamentals in place in my mind, TA helps me to identify entry points, exit points and apply some money management. In other words, the fundamentals help me to decide on an investment path, and TA helps me to navigate the journey.

Let's first consider the seasonal patterns for gold. This first chart below shows the average monthly moves of gold over the last 40 years. Normally, you would expect to see a strong move in gold in early October which we have had followed by a decline in the second half of the month.

We appear to now be experiencing that too. Gold began the week at $1,680, went as low as $1,630 yesterday before rallying to $1,660.

I like to be aware of seasonal patterns, but, for me, they are a secondary, not a primary trading indicator. September, for example, is usually a strong month for gold. This year it was horrible. So I don't rely on seasonals.

(My thanks, as always, go to Nick Laird of www.sharelynx.com for the chart. Incidentally, I interviewed Nick this week in my podcast he had some extremely interesting insights. This will be uploaded to my site later in the week).

A good buying opportunity is coming up

What has, however, become one of my primary technical indicators for gold is the 144-day moving average (144-dma). This shows the average price of gold over the last 144 days. Perhaps it's coincidence, or perhaps it's because 144 is a Fibonacci number, I don't know. But the 144 dma has proved to be an astonishingly reliable bottom-caller since 2009. It seems to have caught the lows once again.

If you look at this next chart, you will see the gold price with, underneath, a red line, which is the 144-dma. Gold's slides, since 2009, always seems to halt here. (It slipped through briefly a fortnight ago, but this was outside of New York trading so we will cut the 144-dma some slack).

It was the trader Michael Hampton who first alerted me to this average, so credit where credit's due. I was the first, I think, to write about it, but it's now finding some renown in the gold-watching blogosphere. Sadly with these things, the more people that are aware of it and use it, the less they work.

But we can worry about that if and when it happens.

Gold currently sits at $1,650. The 144-dma lies at $1,606 and rising. I dare say the two will meet in the coming fortnight, which is when you should be looking to get long. Leave some orders in the $1,610 to $1,630 area maybe? And, if you want to play it really safe, put in a stop loss somewhere beneath that red line.

Gold will never fall below £1,000 an ounce again

As for gold in pounds, I would say buying as close to £1,000 an ounce as you can get makes a great deal of sense. I like making bold pronouncements, so why don't I give you one here? Gold will never fall below £1,000 an ounce again. Triple-digit gold, in sterling terms, is a thing of the past.

The current price by the way is £1,050 an ounce, so I'm cutting it pretty fine and could easily end up with egg on my face. But I'm making this call as much out of sterling bearishness, as I am gold bullishness.

In short, even though I suspect we've seen the highs for the year in gold, we can expect new highs some time in 2012. Now is an opportunity to position yourselves to enjoy them.

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Gold this morning is at $1,890 an ounce. It began July at $1,480. That's a move of over $400, or nearly 28%, in barely seven weeks. A number of wiser heads than mine observe that that's a parabolic move and that parabolic moves barely end well.

Is 25% in two months really 'parabolic'? Maybe. However you define parabolic, there is a very strong argument to at least take some profit after a move like this.

But what would you do with the money? And what about the risk of missing out on further gains?

What to do, what to do?

How to avoid temptation to sell your gold

When I first bought gold, I deliberately bought some physical gold and stashed it in a remote location for the simple reason that it would be a pain in the backside to sell. If I want to sell, I've got to go to said remote location, dig it up, cart it to a bullion dealer, negotiate a price and so on. Selling would not be a decision lightly taken. This was a deliberate step to remove any temptation to trade. I would only sell after a lot of consideration when I thought the big move was ending.

Exchange traded funds (ETFs), spreadbets and even the online bullion banks, where you can buy or sell at the click of a mouse, make trading too easy. It would be easy to think 'we've had a good run, I'm going to take profits, wait for a pullback and then get back in'. Meanwhile, the financial system collapses, gold goes to $10,000 an ounce and you've lost your position.

The more trades you make, the more mistakes you're likely to make. Goodness knows, I've made enough.

Yes, gold has gone ballistic; yes, it's getting too much media coverage; yes, it's trading at the top of its range; yes, it could easily pull back to $1,400 and there would be no technical damage to the long-term chart. But the risk is that if you sell, you then fail to get back in. You lose your position.

One of my closest trader friends, whom I hold in highest regard a doctor, a Yale graduate and a member of MENSA bought into gold at $250 an ounce at the very beginning of this bull market. He saw the light long before I did. He bought what are now billion dollar mining companies almost for pennies. He made a fortune between 2001 and 2007. But since 2009 he's been overly bearish and missed the whole rally. He failed to get back in. I'm sure there are many more like him.

Gold still has a long way to go

I can draw a million and one charts showing why you should sell gold now. But the fact is we still have a long way to go before we reach the end game. Heaven knows, The Times, who mysteriously have been steadfastly, resolutely silent on gold for several years now, despite numerous offers from me, finally mentioned gold in their Saturday editorial. They declared that 'demand for gold depends on factors such as dentistry' and that Gordon Brown 'was right to get out of gold'.

The mind boggles. While such breathtaking, eye-popping ignorance remains in the mainstream, you know that gold still has much further to go. These are all people yet to come into the market. In fact, I might add a positive article in The Times to my list of long-term end-game targets up there with the British government buying.

House prices still have further to fall relative to gold. Stock markets have further to fall relative to gold. We still have negative real rates. Governments are still spending money they don't have, then debasing their currencies to cover the deficit. The financial system is coming under a force of pressure it will not be able to withstand. I can go on, but you know by now what the drivers are and I don't want to end up in Rantsville.

If you must trade, there's a strong case to be made for selling gold and buying silver here, as the latter has lagged. There's even more of a case to be made for selling gold and buying gold equities, which have also underperformed. In fact, this week gold equities of all kinds actually held up quite well while stock markets resumed their assault on hell. That makes me rather bullish.

But the short of it is this. Be right and sit tight. Stay on the train maybe rollercoaster is a better metaphor and enjoy the ride. The bull will try and shake you off in all sorts of different ways. Don't let him.

Just look at the long-term gold charts

I'd like to show you next a couple of charts. The first is a log chart of gold since 2001. I have drawn a channel which shows gold's trading range through the bull market. We are trading at the top of the range, which makes a correction likely, healthy even.

We could easily fall to $1,400 or $1,500 and there would be no damage done to the trend. So there's a case to take some profit (a case I would ignore by the way, if you haven't yet got the thrust of today's argument).

Next let's consider a linear chart of the same ascent.

For the first five years of its bull market gold traded in a clear upward channel, as denoted by the blue tramlines. At the end of 2005 it broke above that channel and the bull market accelerated. The upper line of that blue channel then acted as support during gold's corrections in the following years.

Since 2006 another clear channel emerged, as defined by the black tramlines, a slightly more vertical channel. After five years gold has now broken out above that channel. Perhaps we are now entering a third accelerating phase of this bull market and we'll enjoy an even more vertical channel for the next five years. And perhaps the upper black line of the 2006-2011 channel will mark support for future corrections. That would be nice. In that case we have support above $1,600.

Cynics may scoff at this absurdly bullish scenario. Let them. I don't say this will happen. I say it's possible.

I'm just a bod from south west London. What do I know? But take a look back at this bull market and it's the cynics, the scoffers and the bears who have been consistently wrong.

In 2001 Professor Niall Ferguson, who went on to write and produce an entire TV series on the history of money, said: "Gold has a future, of course, but mainly as jewellery".

'The man who predicted the financial crisis', Nouriel Roubini, in October 2009 said: "All the gold bugs who say gold is going to go to $1,500, $2,000, they're just speaking nonsense".

All I can say is "LOL". (Or, for those of you unfamiliar with text messaging abbreviations, 'laugh out loud'.)

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A few months back I said we'd see £1,000 gold by the autumn.

I didn't think we'd get there this fast.

This week, gold made it onto the front page of the FT. And this lowly writer was even asked to come on BBC Radio 2's Drivetime show to talk about it. (Listen to the programme here and scroll to 1:32)

So I see some potential for downside. Gold usually only hits the mainstream like this towards the end of runs. And moves like the one we've had over the last month or two have to correct. I expect there will be some selling pressure as the US decides what it's going to do about its debt and the expectation panic' settles.

Does this mean we should be selling? Perhaps in your trading account'. Otherwise, absolutely not.

Owning gold is not the risk, "not owning gold is", as Marc Faber said last week. Longer term we are going a lot higher.

How high? Well, I've come across some interesting research this week by Thomas Paterson of Gold Made Simple that proposes some refreshingly new answers to that question

The explosion in the Bank of England's balance sheet

(I'm not going to explain the workings of these BoE balance sheets today, but the essential thing to grasp is that they tell us how much money is in circulation, be it physical paper or electronic money available to be lent via the banks).

During the 1970s gold rose 2,500%, from the (artificially low) price of £15 an ounce to £371 by 1980. Paterson observes, "a 300% increase in money supply resulted in a 2,500% rise in the price of gold".

Fast forward to today and we see that 300% increase in the BoE balance sheet looks positively restrained, prudent even. In the 11 years since 2000, the BoE has increased its balance sheet "by a staggering 1,000%", says Paterson.

In that time gold has risen about 530%, from £180 to £1,000 an ounce this week. For the 2,500% rise of the 1970s to be replicated, you're looking at a final destination of £4,500. But if you factor in BoE money creation, you can more than triple that number.

Of course, I should point out that the flaw with comparisons to the 1970s is that the 70s bull market began from artificially low levels. The gold price was fixed until 1971. There are those who would argue that gold, if not fixed, was suppressed in the 1980s and 90s indeed still is but let's not go there for now.

I will say this though. The monetary stress the world faces today comfortably exceeds that of the 1970s.

Could the gold price really go above £20,000 an ounce?

I wrote about veteran gold trader Jim Sinclair's model

Let's tackle our own money issuance with some same thinking. How high would the gold price have to be if the BoE's gold holdings were somehow to reflect its money in issue?

Throughout the 19th and early 20th centuries, the UK is supposed to have been on a gold standard. In reality, only about 25% of the UK money supply was backed by gold, although this percentage varies, ranging from about 15% in the early to mid 1800s to over 50% in the 1920s. I quote Paterson:

"In 1850 the balance sheet of the BoE was about £63m, and there were 2.63 million ounces of gold sitting in a vault at the BoE. So for every ounce of gold there was about £18 in existence. The gold price was set at £4.25 so about 25% of UK money supply was backed by gold."

By 1921, the balance sheet had grown to £300m or so, with 27 million ounces of gold backing it. With the gold price at £5.35, about 50% of the UK money supply was gold-backed.

By 1965, we were back down to 25%, with £3bn on the BoE balance sheet backed by 65 million ounces of gold at £12.50. Then, by 2000, just 12% of the BoE balance sheet was backed by gold.

Since then, money-printing by the BoE has been so rampant that, despite the rising gold price, just 4% of the BoE balance sheet is backed by gold.

Here we see the chart that shows the percentage backing by gold of the UK money supply since 1830.

In other words, there is a lot of room for gold to appreciate if it is to catch up with the money supply.

Here's another way to look at it. From 1830 to 1950 there were 20 pounds on the BoE balance sheet for every ounce of gold. From 1950 to 1965 the figure averaged £40. (See the chart below).

Now we see today.

There are £23,388 for every gold ounce at the Bank Of England! And Paterson calculates that, for UK money to be 100% gold backed, at current levels of money supply that is the price gold would have to be per ounce.

I doubt that's going to happen. And of course, the BoE could shrink its balance sheet or even buy more gold which would change the equation again. But as things stand, even if we were to return to the long-term average of 25%, you're still looking at several multiples of today's price. Some nice food for the bulls.

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At the beginning of May, gold touched $1,575 an ounce, a record.

It's been in a downtrend ever since.

At least, that's assuming you look at the dollar price of gold.

But for sterling investors it's a different story.

In fact, gold has broken out to new highs, just this week.

For British investors, the dollar price of gold is noise

There are only two prices that matter to an investor, goes the old saying - the price you buy and the price you sell. Everything else is just noise.

In many ways, for a UK-based investor, the dollar price of gold is noise. We bought our gold with pounds, for the most part, and we'll most likely sell it for pounds, (assuming they still exist when we do come to sell).

Yet we are obsessed with the dollar price of gold. Silly us.

Here is a chart which shows gold since 2001, priced in sterling (the dotted line is the 200-day moving average). During the first part of the decade the pound was relatively strong on the forex markets it shows you just how irrational markets can be and gold's gains against it were only gradual. In autumn 2005, however, that changed and the price gains suddenly accelerated.Gold has since maintained that faster pace.

What I like about this chart is that, although the sell-offs since 2005 and we seem to get one or two a year are violent, it is actually quite an orderly uptrend, with a clear channel in place. We now stand just shy of £950 an ounce. I'm confident we'll see £1,000 gold before the end of the third quarter.

Sir Isaac Newton, who, as Master Of The Mint, put us on a gold standard in 1700 with a pound around a quarter of an ounce, must be turning in his grave not that Mervyn King will care.

A warning from Belarus

Gold is also breaking out to new highs against the euro. The euro price of gold now stands at €1,080. Here's a chart. We see that similar pattern of acceleration which began in 2005 (again, the dotted line is the 200-day moving average).

Despite these high prices, if I were a Greek or a Portuguese citizen I would make going to the coin shop tomorrow morning a top priority, given everything that's going on.

Just this week the government of Belarus did what I am sure the Greek, Irish and many other governments would like to be able to do and may be forced to do, should they drop out of the euro. It devalued the Belarus rouble by some 30%.

On Tuesday, the National Bank of Belarus set the official exchange rate at 4,930 Belarusian roubles per US dollar, whereas the day before it fetched 3,155. (The freely-traded interbank rate stands at about 7,000 roubles).

The Belarusian citizens are now paying for their government's failings with the destruction of their money. Why should they? It's not right. But that's governments and their fiat money for you.

But any Belarusians who owned gold and silver have just seen their purchasing power increase by something like 60% overnight. They have protected themselves and preserved even increased their purchasing power.

"Thanks to a large trade deficit and rapidly falling hard currency reserves" says the BBC, Belarus "faces a serious financial crisis". Sound familiar?

This is a global problem. It was Belarus the week. The day is not far away when it will be someone bigger. As Paul Tustain of Bullionvault is so fond of saying, most countries face either "a market-driven collapse or an austerity-driven collapse". With current global levels of debt and deficit, one or the other is inevitable.

Britain's credit rating comes under threat

And it may come sooner than we think. This week China's Dagong credit rating agency downgraded the UK's credit rating from AA- to A+, putting us on a par with Chile, Belgium and the US, which Dagong downgraded in November. (If I was Chile, I'd be rather miffed). And sterling is beginning to slide once again.

The easiest route out of this debt crisis has been for governments and central banks to devalue their money and they will continue to do so, as long as markets and people let them.

We have 4.5% inflation, officially, although we all know it's much higher than that. This time last year the Bank of England said it would be 1.75%. They say it will fall next year. How do they know? Why should we give them any credence at all, when they keep getting it wrong?

Why are they not putting up rates? Because they have decided that debtors can't take it. They'd sooner devalue the currency. It's the path of least resistance.

Well, let them if they want to. Buy gold instead. Stop using their money, if they're intent on destroying it. They can go on as long as they like. Gold will keep rising until they stop.

And when they do stop, you'll be able to buy a lot more with your gold than you can now.

Just like the gold-holders of Belarus.

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I keep saying silver is not for the faint hearted. But even by silver's standards this past fortnight has been breathtaking.

The rally from $8 to near $50 has taken some 30 months. In just five trading days, as silver slid from $50 to $33, 40% of that rally was given back. It was the biggest weekly fall in silver since 1975.

Three days later, silver was up another 20% back near $39. Yesterday it was selling off again in a similarly dramatic fashion.

Talk about a white-knuckle ride.

They say the bull does everything he can to throw you off. But this one has an excess of testosterone or adrenaline or whatever it is that bulls have.

What drove the fall in silver?

Much of silver's fall has been blamed on the fact that the owners of the Comex (Chicago Futures Exchange), CME, announced that the margin requirement on silver was to rise by 84%. In other words, if you were betting with borrowed money, you had to put a bigger deposit down.

This will no doubt have caused any leveraged traders to make a move towards the exit. This move quickly became a rush, which became a stampede. In total, five margin hikes were made in nine days.

Regular readers will know that I don't have a lot of time for the various rumours you hear that suggest the silver market is manipulated. Not because I think they're false I don't know but because there's not a lot I can do about it, except shout.

In general terms, the problems I have with such theories for example, that there is a deliberate plan by governments to suppress the price of gold and silver is that they imbue the perpetrators with too much competence. Competence and government are, as far as I'm concerned, two words that rarely, if ever, meet unless there is a large not' somewhere around.

Was the decision by Gordon Brown, for example, to sell our gold at the bottom of the market a deliberate scheme to suppress the gold price? Or was it simply idiotic?

But the fact that this announcement came just as silver was closing in on that hugely significant (from a technical point of view, at least) 1980 high of $50, is almost too coincidental. It's as though someone wanted the price to fall.

Fortunately, if any such shenanigans are going on, we won't have to endure them or the rumours for much longer. On 18 May, the Hong Kong Mercantile Exchange (HKMEx) will make its trading debut with a one-kilo gold futures contract (roughly 32 troy ounces), offered in US dollars with physical delivery in Hong Kong. If this is successful and I'm sure it will be, the Chinese will be all over it it won't be long before we see a HKMEx silver futures contract.

If there really are dark forces at work on the Comex, business will quickly move to the HKMEx, particularly our Asian pro-precious metals fraternity, rendering the former as obsolete as the infamous London Gold Pool of the 1960s.

It makes sense that silver peaked at $50

But to be fair, if we are honest with ourselves, we must accept that silver had gone parabolic, that $50 was an obvious place for the party to end, and that parabolic charts rarely end well. What's more the correction has come at a time of year when precious metals are weak.

Wearing my trader's hat for a moment, I would say this correction isn't over. Corrections usually come in three waves. We've had the initial drop from $50 to $33. We'll call that wave A.

With silver, typically, these waves last between three and six days. (This is based on the evidence of the major silver sell-offs of 2008, 2006, 2004, 1993, 1987, 1980, 1979 and 1974.) And typically they give back between 30% and 45% of the previous rally.

So, thus far, silver is behaving according to the script.

The rally to $39 may have been the dead cat bounce, which we'll call wave B. But it does seem to have unfolded a little quickly. Typically with silver, the dead cat bounce will end 15 to 20 trading days after the initial high (the intra-day high was 25 April; the closing high 28 April), although in May 2006 it was just 12 days.

If Monday was the end of the dead cat bounce, it has only come eight (or 11, if you count the high as 25 April) days after the high.

As I write this, silver is starting to sell off once again. It's back at $35. So it does seem that we are now into wave C, which will take us to our final low.

Typically the final low is made between 22 and 33 days after the high, which would suggest the second or third week of June as a target. But perhaps it will come sooner, given the speed with which this market is moving.

The most bullish case is that the eventual low does not exceed the low of the first sell-off. In other words that $33 holds. But I'd suggest a more likely scenario is that we go back to somewhere in the $20s, maybe even as low as $22.

I went to a dinner last night where a number of fund managers each gave a two-minute presentation on where they think markets are headed. The sentiment is generally a little on the bearish side, but a number of speakers were suggesting we are making a major top here in both commodities and stocks. If they're right, and we're in for another deflationary wave, just as Bernanke and others end their latest bout of quantitative easing (QE) in June, then silver may even fall further than $22.

But I doubt it. If markets fall, policy-makers will print. That is their strategy. And silver will benefit.

But there are so many people that will have been hurt by all this volatility that I suspect it will be some while before the market falls in love with silver once again.

Where is gold heading next?

Meanwhile, I'll be looking at gold and the 144-day moving average, which shows the average price of gold over the last 144 days, as it's likely gold and silver will make their lows simultaneously. The 144-day moving average has been catching the lows beautifully since the bust of 2008, as this next chart shows. (Read: Gold will hit $1,650 before the end of the year to see how beautifully it worked in January) That average currently stands just above $1,400 and rising.

Will it work this time? We shall see.

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There have been three main drivers to the secular bull market in commodities, be it copper, crude oil, or corn.

First, a chronic lack of investment throughout the bear markets of the 1980s and 1990s has led to a shortage of supply. Second, this shortage of supply has come just as eastern Asia, particularly China, is modernising and rebuilding its infrastructure.

And, third, our modern fiat system of money and credit makes inflation and speculation inevitable, especially when it is subjected to the insanely loose monetary policies of our central bankers.

Generally speaking, most people cite driver number two, China, as the reason for the rise in the price of raw materials base metals, grains, energy the commodities that are being consumed voraciously as China's middle class grows. Gold, on the other hand, we are told, is rising mainly because of inflation and fears 'about the system' driver number three.

But what if you took 'driver number two' and applied it to gold? What if the Chinese middle class all wanted gold?

What if everyone in China buys an ounce of gold?

I'm asking this question now because a number of people have emailed me a report by Robert Lenzner for Forbes which says: "The People's Bank of China (PBOC) recommended yesterday (25 March) that one billion Chinese consider buying gold as a hedge against inflation".

I've been unable to substantiate this claim as, although I've found the report, it's in Chinese. But the Chinese government has in recent years promoted different gold funds, launched a global gold contract based in yuan by the Chinese Gold & Silver Exchange, bought into various gold mines and minted all sorts of bullion products, so it seems clear the Chinese are keen on some kind of gold ownership.

Of course, most Chinese people simply aren't rich enough yet to buy an ounce of gold. And I'm not sure it would be physically possible for everyone to do so. Only five billion or so ounces of gold have been mined in human history (or since 1835 at least). A billion Chinese people can't suddenly buy 20% of all the gold that's ever been mined.

But China's appetite for gold is certainly on the up. I had dinner recently with the head of precious metals at HSBC. Most internationally traded gold comes through his vaults at some stage. He said that, even although China is now the world's biggest producer, he sees hardly any Chinese gold coming through. In other words, China is not exporting, but hoarding all its own gold.

So it's worth considering the impact that increased Chinese buying of gold would have on the market by taking a quick look at some supply and demand numbers.

Demand for gold is outstripping supply

This first chart (my thanks as always to Nick Laird of www.sharelynx.com) shows annual gold production. Over the last 15 years it has ranged between 2,400 and 2,600 tonnes. That's about 80-90 million ounces.

So annual supply would be enough to buy, say, every single person in Germany an ounce each. (But certainly not every single person in China). And the rest of the world would have to go without.

This next chart shows cumulative gold production since 1835. During that time, as I mentioned above, something like 160,000 tonnes or five billion ounces have been mined.

(Interestingly annual gold production has roughly matched population growth, another factor that makes it a natural form of money).

But here's the clincher. Our third and final chart shows global gold production (the blue line) since 1950, and in green, global gold demand. In red at the bottom, we see the deficit this creates.

Interestingly, demand remained below supply until the early 1970s which was when the US took itself off the last vestiges of the gold standard. Since that time, demand has outstripped supply.

The deficit fell sharply in 1978, 1986, 1993 and 2008. Its sharpest rises came in 1965, 1974-1977, 1990-2, 2000-02, and 2010.

Here's that same chart in cumulative form.

It shows quite clearly the change that occurred in 1999, coincidentally just as Gordon Brown was selling our gold. Cumulative demand overtook cumulative production, and the deficit went into the red. That was the beginning of the bull market.

Chinese demand will keep the gold bull market going

The annual deficit stands at about 1,650 tonnes or about 53 million ounces. But the cumulative deficit now sits at around 14,000 tonnes. That 's roughly 450 million ounces over half an ounce for each person in China. So where on earth could their billion ounces come from?

I don't know about you, but in both the annual and the cumulative deficit charts above, I see what is known as a 'steadily rising trend '. It will take some kind of major event for example several multi-million ounce deposits coming into production just as a global revolution restores fiscal rectitude to government to reverse that trend.

In short, any increased buying by China 's middle class and it is buying already is just going to add to an ever-increasing deficit.

The bull market is alive and well.

And it's not just gold bullion which will benefit. Although riskier, there's also the junior gold miners. And one of my trusted colleagues has found one such company that is right on the border of China. Evidence suggesting there are others is everywhere, and you can see the latest mining and metal developments right here.

N.B. You'll see Portugal has just asked for a bail-out. We'll be looking at this tomorrow.

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The correction is dead. Long live the bull market.

Another week, another new high in gold and silver.

The inexorable rise continued yesterday with gold breaking out to new all-time highs at $1,433 per ounce. It's now in positive territory for the year. Silver meanwhile hit $34.65 per ounce.

But here's the action that surprised me: gold was up in the face of falling stock markets

Has gold 'decoupled' from other assets?

I have been harping on about this all-one-market syndrome for a while. This is where asset prices be they stocks, precious metals, commodities or fine art rise together, as the US dollar falls. Then, when the dollar stages one of its anaemic rallies, asset prices fall.

But in the last three months there has been some possibly significant de-coupling action. Early November 2010 saw gold's first attempt to break through the $1,425 barrier. This failure coincided with highs in the stock markets of India, Russia, China, and others the emerging markets, in other words. They have all been in marked downtrends ever since, although there are signs some sort of low may have been made.

As these markets turned down, so the US dollar rallied or at least, it did at first. But, come December, this rally was overtaken by the major Western stock markets. The Dax, the FTSE, the S&P 500, Dow and Nasdaq all powered on higher, and the US dollar turned down.

Indeed, until a week ago, Western stock markets seemed oblivious to the revolution that is spreading through North Africa and the Middle East like a Mexican wave. It's only now that concerns seem to have finally set in and stock markets are selling off. The Dow was down some 200 points yesterday.

But, unlike in 2008, money is not seeking the 'safety' of the US dollar. The dollar is down on the year, and, yesterday, even with that ugly stock market action, little better than flat on the day.

Here we see the US dollar index, which shows the dollar against a basket of foreign currencies.

Money did, however, seek out gold, which broke out to new highs. Indeed it closed near the high of the day, which usually bodes well.

If gold goes to $1,500, silver could breach $40

Now I think there's a good chance that gold could set off on one of its runs here. I don't know, of course, nobody does. But my magical 144-day moving average (see my previous money morning: Gold will hit $1,650 before the end of the year) (the green line in the chart below) has held; gold is in a nice channel; we have broken out to new highs; and mid-March to the end of May is often a strong time of year for gold.

A move back to the top half of that channel will see us over $1,500 within a month or three.

On the negative side, gold stocks are lagging and are still below their December 2010 highs. But a few more days like yesterday will see them catch up pretty quickly.

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If gold stocks are lagging, silver is leading and the action in this market is simply breathtaking. If gold makes it to the $1,500 range, then silver will be somewhere over $40. At present silver is the most expensive it has been relative to gold since 1985, when the silver:gold ratio brokeabove 45.

On current form we are headed back to the old ratios of the 1970s, when silver was considerably more expensive in relative terms. (I will talk at length about the ratio between gold and silver in a future Money Morning). We might even one day see the old monetary ratio of 15-18, which would mean more than a doubling of the silver price even if gold doesn't move.

Soaring gold could be a nightmare for the rest of the economy

But one day doesn't make a market. Are we really seeing a de-coupling? Are we finally entering a period when gold rises just as stocks fall? I don't know. But my friend, the trader Roy Barber, is fond of sending me charts of the ratio between gold and the Dow.

This has been falling since 2000, when the Dow was incredibly expensive against gold. He thinks that ratio is eventually falling back to 1:1. So, if the Dow is at 10,000, so will gold be at $10,000. I'm slightly more conservative than that. But here's my simplification of his stepping-down pattern:

But a rising gold price in the face of falling stock markets over a sustained period? That will mean there is an ugly scenario across the broader economy. Be careful what you wish for

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Some people had been wondering if the recent correction in the gold price, which began at the New Year, was anything more than a normal bull market correction.

It appears that it wasn't.

The excessive bullish sentiment has been washed out. There is a proliferation of uninformed articles in the press and online, written by people who don't, and have never, owned gold, declaring that the bull market is over.

Obscure European bankers have stopped calling for a return to the gold standard. And my Aunt Doris is no longer phoning me to ask about the mineralisation of some dodgy miner's drill core.

Yet we're still in a very nice uptrend.

So what next?

Gold has hit my January target

If you've been following my Money Mornings recently you will remember that I was looking for gold to return to its 144-day moving average its average price of the previous 144 days by late January: How low will gold go?

And on 28 January that's exactly what it did.

This was the chart that I posted.

And here, in close-up, is what happened next. This is gold in 2011. The blue line at the very bottom of the chart is the 144-day moving average.

Here's how that looks on a broader scale.

Finding an investment method that works for you

Why has it worked so well? I wish I knew. 144 is a Fibonacci number, of course, so that will have fans of The Da Vinci Code jumping up and down.

But I will say that these things work until they stop working. That might sound ridiculous, but in my experience, it appears that whatever trading and investment method you use from the sensible, plodding analysis of price to earnings ratios and book values, to the some-would-say lunatic (pun intended) analysis of planetary cycles strategies seem to work for a while, then for no apparent reason they stop. Then, just as mysteriously, they start working again.

You have to find a method that sits well with you. The down-to-earth look at earnings ratios, while the eccentric might look towards the stars. I happen to like moving averages and trend lines. And since the bust of 2008, the 144 has worked brilliantly for gold.

There will come a time when it stops working. When it does, I have to be man enough to recognise that and move on. Or if I'm that sure of my method, sit patiently and wait till it starts working again, just as a value investor waits for a company's 'true value' to be recognised.

The gold bull market is still on course

So what now? Gold only gave back 40% or so of its move from the summer lows. Silver was even stronger, yielding just 35%. Yet that's all it took to purge the markets of excessive bullish sentiment. I'd say that bodes extremely well for the longer-term bull market in precious metals.

Why? Because the closer you get to the end of a bull market, the harder it is to shake investors' conviction. If the bulls are still easily rattled by relatively small corrections, it's a healthy sign.

Here's one example of how excessive bullishness has been washed out. You may have heard that a hedge fund sold off a large gold futures position in recent weeks. According to reports, a $10 million fund was holding a position larger than the entire annual production of South Africa. Given the leverage these people use, it's no wonder there is so much volatility. (I don't know how they manage to sleep at night when they do that. You'd be better off buying an explorer but each to their own.)

This liquidation has seen the open interest on the Chicago Futures Exchange (the COT) shrink back to levels of summer 2009. (To be precise, the commercial traders' net short positions are at July 2009 levels and the non-commercials' net long positions are at May 2009 levels.)

What does this mean? The positions of the traders on the futures exchange are seen as a forerunner of the gold price. There are three sets of traders: the commercials, the large traders and the small speculators. Broadly speaking, the less open interest there is, the more bullish the set-up. And the fewer short positions (ie the fewer bets that the market will fall) that the commercial traders (who are seen as the 'smart money') have, the more bullish the set-up.

The logic of this is that the less open interest there is, the more potential buyers there are to enter the market. So the fact that open interest has fallen back to 2009 levels is very positive.

Of course, the COT data isn't an infallible indicator nothing is. And the proliferation of other means to invest in gold outside of the futures market, such as the exchange traded funds (ETFs), also brings into question just how representative the futures data is. But I still find the COT to be a useful indicator of market lows.

So what now for gold?

I must say I'm not wildly bullish in the short-term. In fact, I expect further consolidation. February is often a good month for precious metals. But March is not. We may well see a re-test of my notorious 144-day moving average then. I would expect silver to hit resistance in the $31-32 area , and we are not far off that now. Gold might struggle at $1,385 or even $1,420. I don't see new highs until later in the year.

I could well be wrong. And do you know what? I hope I am.

But in the longer run, the fact that so many are starting to doubt gold, even in the face of runaway inflation everywhere you look, has to be positive.

$1,650 before the end of 2011? I should say so.

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The eyes of precious metals' investors are watering.

2011 has not been a good year so far.

We are not even through the first month and the price of gold is down $100 an ounce, or 7%. Its volatile sister silver is down almost 15%, as are the large cap gold stocks. The junior producers, meanwhile, have fallen some 20%.

Ouch...

Market corrections are normal - and welcome

The first thing I would say is that these corrections happen. This is nothing new. There's nothing abnormal here. Since 2001, when this bull market began, we have had at least one such correction, usually two, every year, as sure as eggs are eggs.

I illustrate this with a chart of silver since 2004 - see below. (Gold and gold stocks are the same, but the corrections are more apparent in the silver chart, because of its volatility). Except for the comparatively flat year that was 2005, these corrections have been at least a twice-yearly occurrence.

I welcome the corrections as they restore some sanity to an overheating market. And let's face it, this autumn gold and silver got overheated.

They also present opportunities to re-invest. The long-term picture for gold and gold stocks remains positive. The rationale for buying hasn't changed. We're still facing a decline in the purchasing power of money against a backdrop of excessive debt and institutionalised monetary irresponsibility.

As for junior gold stocks, you need only consider the longer-term objectives of the company and the potential for growth and development, once properties are fully explored and production is at full tilt.

If you were to liken a gold company to a man's life cycle, then a senior gold stock might be your gent in his 50s or 60s, who has already - career-wise (with some notable exceptions) - done much of what he is going to do. Your junior producer is your younger man who still has much of his high-achieving 30s and 40s ahead of him. While your explorer is your student or graduate in his early 20s, who is still figuring out exactly what it is he is going to do with his life.

Look on this correction as an inevitable transgression in his development, a temporary aberration, a jolly.

So as long as you're not too geared or leveraged (using too much margin via a spreadbet for example), it's pretty easy to stay focused on the longer-term picture. And I don't see much need to use leverage when playing gold. Junior mining companies are so volatile they can be your gearing. Others do use leverage - some successfully - but the problem I have is that it is too easy to get shaken out.

So how long will this correction last?

Since the beginning of this bull market, in seven of the last ten years, the low for the year in gold has come in either January or February. The exceptions to this were 2003, when the low came around late March/early April; 2004, when it came in May and 2008 - the outlier year - when it came in October. Based on this, there is a good chance that we are close to lows for the year.

Second, we are nearing my target stated a few weeks back of gold's 144-day moving average - the average price of gold over the last 144 trading days. That average now sits at $1,305, and rising. Since the crash of 2008, gold has consistently found support there.

For sterling buyers of gold, the 200- and 252-day moving averages (blue and red lines) have both been pretty reliable indicators. They currently sit above the £800 per ounce mark.

The same goes for gold stocks. The 252-day moving average often marks a good entry point. Here we see the HUI, the index of unhedged gold stocks, with the moving average underneath in blue.

(If you want to buy a basket of gold stocks, US:GDX is the ticker for the exchange-traded fund (ETF) that tracks them, and US:GDXJ for the juniors).

In short, we are not far off the zone where - by my reckoning - some 'dipping back in' makes sense.

However, this does seem to be unravelling very fast. Perhaps I am being complacent here. We shall soon find out.

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Gold and silver have both entered a correction phase.

Gold began 2011 at around $1,420 an ounce. By the end of last week, it was more than 3% lower at $1,370. Silver, meanwhile, toasted the New Year at around $31 an ounce. Celebrations were due it had risen some 80% in 2010 but the hangover quickly set in. A week later it was down more than 5% at around $28.60.

Meanwhile, at $34, Silver Wheaton one of the leading silver stocks is now down over 20% from its early December high of $42. That's quite a wallop.

But gold and silver have had a stellar 12 months. This correction is overdue. And it's one that I welcome. Nothing goes up in a straight line and all that. Ultimately, it will add to the longevity of this bull market.

How low will gold go?

The fundamental argument for gold has not changed. The world over, we still have inflation, deflation, negative real rates of interest, unpayable debts at most levels of society, unsustainable deficits, out-of-control government spending, misguided monetary policy leading to mal-investment, excessive speculation and bubbles I could go on.

There are many drivers to this bull market in gold, and none have gone away. Nevertheless, corrections are inevitable. We have one now. The question is: 'How low will it go?'

I'd like to try and answer that as I feel I've made a bit of a discovery: the 144-day moving average. It doesn't sound that exciting, but it's amazing how well it has been working over the last two years.

There are 252 trading days in a year. Prior to the crash of 2008, once or twice a year, gold would return to its 252-day moving average (the average price of gold over the previous 252 days). It would flirt with it for a while, before making its next move up.

Here is a chart of gold from 2001 to 2008, which demonstrates this:

Charts courtesy of Stockcharts

However, since rebounding off the crash of 2008, it has not gone back to this line once. Rather, the 144-day moving average (blue line on the chart below) has been the line to which gold has returned. It seems to go there two or three times a year.

That 144-day moving average currently lies at around $1,300 an ounce and rising. I suspect we will get to it on this correction. If we follow the time scale of previous corrections, then we should reach the low towards the end of January.

If gold bursts down through that line with volume, then we are in for something a bit more serious than a normal, ongoing bull-market correction. But I am fairly confident it will hold, barring some sort of global liquidity panic.

For those of you who want to follow gold against this moving average, here is a chart that will track progress.

If gold does get to this line, one low-risk trade might be to buy gold at the moving average with a stop just below.

I should say that when gold corrects, you usually see one wave of selling. This is followed by a bounce, which is then followed by a second wave of selling, at the bottom of which you see the low.

We have had the first wave of selling and, as I write this, we now seem to be enjoying the bounce. So it's likely that that second wave of selling is just around the corner.

The three phases of bull markets

It is said that a major bull market has three phases. The first phase is the stealth phase, where only the 'smart money' gets onboard. This is followed by a correction. The second phase, typically the longest, is known as the 'wall of worry' phase. This is when more and more institutions start to come onboard, the sector receives more and more media coverage, but there is still a great deal of incredulity and denial. People think they are too late to invest.

Finally, we have the euphoria the mania phase where the proverbial shoe shine boy starts giving you advice.

If you look at stock markets, you saw this stealth phase between 1980 and 1987, before we got the crash. From 1987 to the Asian crisis of 1998 we enjoyed phase two, the 'wall of worry' phase. Then from 1999 to 2000 came the insanity.

This is a fairly arbitrary cycle of course. But I would argue that we are somewhere in phasetwo in this gold bull market. I am still amazed at how few people actually own gold. Phase one, the stealth phase, was between 2001 and 2008 and ended with that bone-shaking meltdown.

Gold consistently found support during phase-one pullbacks at its one-year or 252-day moving average. With the acceleration that you often see in part two, perhaps the 144-day moving average will define this second 'wall of worry' phase, consistently marking support. We shall see.

The 252-day moving average still works for gold stocks

For gold stocks, however, the 252-day moving average has been dependable. It was a fairly reliable guide to rough entry points into the sector from 2001 to 2008, but here we see what a remarkable marker it has been since 2009. This a chart of GDX, the exchange-traded fund (ETF) for the major gold stocks:

It's amazing to see how it 'kissed' the average in early August 2010, before its stellar run since. Just as I am looking for gold to head back to about $1,300 and its 144-day moving average, I am looking for GDX to head back to the $51-52 area, another 10% or so from here.

For those who want to track the chart, here is a live link.

By the way, it's worth noting how gold made three attempts to break through the $1,425 mark and failed. But as gold was making its third attempt, the gold stocks were putting in a much lower high. That is your 'bearish divergence'. Gold's move was not confirmed by the stocks, which were weaker. The stocks did not 'believe' the move. That is often a sign of trouble ahead.

It's also worth noting that since its first November high, gold has lagged the broader US indices, which have gone on to post higher highs. Like gold, however, emerging market indices also lagged.

As I have noted before, we have been in an 'all-one-market' environment, where all asset classes rise as the US dollar falls and vice versa. But if, as we're seeing now, not all markets are rising together anymore, then we have something to think about. Just as gold's high was unconfirmed by the gold stocks, the S&P 500's recent high has been unconfirmed by other global indices. That could portend trouble ahead for the US market.

Nevertheless, I am looking for a turbulent month which should see a move for gold back to its 144-day moving average, where I am guessing it might find support. That hopefully will mark yet another entry-point into this wonderful bull market.

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Gold and silver have broken out to new highs yet again. It seems to be happening almost every day now.

Yesterday, gold broke new records, closing in the US at $1,340 per ounce, while silver is now through its 2008 peak, closing at $22.80 an ounce, also an all-time high, except for a few crazy days in 1980.

In short, it's been an amazing couple of months for precious metals. So where is it all going to end?

While the dollar keeps falling, gold will keep rising

These new highs in gold and silver are as much a function of US dollar weakness as anything else. The US dollar is capitulating. In barely six trading days it has fallen from 83 on the index (measuring the dollar against a basket of other major currencies) to 77.75.

It looks as though we're going to at least test the blue trend line that I have drawn on the chart below. If that doesn't hold, I daresay we will head pretty sharply back down to those all-time lows of 2008. And if they don't hold, well gold will be at silly numbers and US deflationists will be eating crow (a weak dollar will send US inflation surging).

Yet, if you look at how many euros it takes to buy an ounce of gold (the chart below), you can see that, amazingly, gold is still about 8% off its highs of June this year. Gold is also trading below its highs against the pound and the yen, albeit by just a few points.

That should put things into some kind of perspective. This rally is about US dollar weakness. So going back to my original question 'Where is this all going to end?' the answer is: when the US dollar finds support.

Bad news for savers across the world

Central bankers have ushered us into an era of global currency wars, as they race to debase their currencies fastest. It's a battle that the US Federal Reserve is currently winning (and what good has it done them?).

But this week, just as gold made new records, the Bank Of Japan took fiscal insanity to a whole new level, slashing interest rates to 0% and then announcing a newly printed pool of 5trn (c. £40bn) to buy all sorts of assets Japanese government bonds, commercial paper, asset-backed commercial paper, corporate bonds, exchange-traded funds and Japanese real estate investment trusts.

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I have some old junk that I was planning to sell on eBay. I'm wondering if I should just cut out the middle man and contact the Bank of Japan directly.

This, of course, follows the Fed's increasingly strong hints over the past fortnight or so that it is moving towards further conventional easing. Up until this point, it looked as though gold and silver were topping the news gave the precious metals new impetus. And today the Bank of England meets to consider further stimulus. Will they take a leaf out of the coalition government's move towards tightening and austerity? Or will they undermine it completely, further driving up asset prices?

We know that savers are currently being robbed, deliberately so, by low rates and other forms of loose monetary policy, as central bankers pursue their, in my view, needless obsession with staving off deflation and 'kick-starting the economy'. With savers effectively losing money through inflation by sitting in cash, they are being driven out of bank deposits as they search for yield or capital appreciation. In short, people are being forced to speculate. What right does a central bank have to rob the prudent in such a fashion?

Another bubble is being blown

You might well be wondering how can the stock market be doing so well when the economy is apparently in such dire shape the central bankers believe they need to act? The answer lies in this loose policy of central banks. By forcing money out of savings, it is creating distortions and blowing up yet another bubble. Is it any wonder that stock markets have had their best September since 1939? Is it any wonder that amid all this, gold and silver are breaking out to new highs?

You can't help but think that this is all heading towards some insane inflationary melt-up, or yet another deflationary bust. My strategy is to keep my core long position in gold and silver and gently take profits in the more speculative part of my gold and silver portfolio. Thus I still benefit from further price rises, should they happen, but I'm also in a position of strength to act when we get the inevitable correction.

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On 21 June gold broke out to new all-time highs above $1,260 an ounce. It pulled back, but then on 28 June it moved briefly above $1,260 again. Ten days later it was down some $80, flirting with the $1,185 mark. That's quite a correction and it's concerned a lot of people, so I wanted to address it in today's Money Morning.

Is this anything more than a "healthy pull-back"? Let's have a look...

A summer pull-back for gold is normal

The first thing I would say is that it is perfectly normal for gold to pull back in the June-August timeframe. The chart below (courtesy of Dimitri Speck) shows the seasonal tendencies of gold, based on its price action over the last 40 years.

As you can see, in the summer gold tends to languish - at the very least - and, as a consequence, the June-August timeframe is usually one of the best times of year to buy.

My second observation is that gold's June high above $1,260 was a function of US dollar weakness. Against the euro and the pound, gold made its high on 7 June - exactly according to Speck's seasonal pattern - and then made a lower high on 21 June.

This next chart shows the gold price since the start of 2010, then beneath (in red) gold against the euro, and beneath that (in blue) gold against the pound.

Is the case for gold weakening?

As we noted in Money Morning the other day, the European Central Bank has effectively tightened monetary conditions recently, and this has been responsible for some of the euro's strength in recent weeks. Meanwhile the pound, under our new austere government, has been a marvel. This semblance of fiscal sanity returning to both sides of the Channel will have weakened the case for gold.

But therein lies the question. Are we really at the dawn of a new age of austerity? Has Austrian economic thinking replaced the Keynesian addiction to government spending? If we are, and it has, then there is no longer such a compelling case for gold.

At MoneyWeek, we don't make judgements based on party politics. We disliked Gordon Brown because he made bad decisions for the country, not because he was a member of the Labour party.

But I have to say I'm a big fan of the steps this government are taking to cut wasteful spending and improve efficiency. I like the fact that they are attempting to lighten the debt load and set the example of living within your means.

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However, one must not get wedded to this new 'austere' moniker. It's early days. There has been no crisis yet. We have to wait and see how they will react when it comes - as sure enough it will. How much mettle will they really have, when push comes to shove?

Meanwhile, we are still in an environment of negative real interest rates. Inflation will come down a little as a result of sterling's recent strength, but annual consumer price index (CPI) inflation is still above 3% and retail price index (RPI) inflation above 5%, while the Bank of England rate is sitting at 0.5%. And neither of those are adequate measures of inflation, as they do not take asset prices into account. As long as savers continue to make a loss, gold should thrive.

In the UK we still have gigantic debts to overcome. We are still overly dependent on the revenue generated by the City, which could quickly diminish in the event of another stock market rout. Our day of reckoning still lies ahead.

But look across the Atlantic and there is no sign of any attempts to get spending in check. In Illinois, for example, which is virtually bankrupt, Fox News reported on Wednesday that "40,000 state workers are to get 14% payraises." This is just one example of many. Money that people don't have is still being recklessly spent. 'Helicopter' Ben Bernanke still believes in his printing press (and Goldman Sachs this week issued a call to him to turn it back on).

Meanwhile, judging by the ever-increasing deficit, Barack Obama seems to think the US can spend its way out of this. The US will have a much greater impact on the gold price than us and, while there is still so much uncertainty and profligacy, gold should be fine.

The gold bull market has further to go

To conclude, I don't think the apparent embrace of 'austerity' is going to stop the gold bull market. The fact is, you seem to get one or two major corrections in gold per year. This has been the norm since the bull market began in 2001. I would argue that now is just another one of many.

In fact, the correction probably has further to go. The signs were there a few weeks back - indeed, I wrote about them here: Three reasons why gold may be due a correction. The new highs in gold were unconfirmed by the gold stocks, by silver and by the other currencies. It's normal for gold to at least drift in the summer.

But if gold were to fall below the magical $1,040 level - the old high and the price at which the Indian government bought last year - and it were to fall on high volume, I would start to think this was something more than a normal pullback.

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After moving above $1,260 an ounce on Friday afternoon, gold closed the week at $1,256. It's a new record.

And it's no surprise.

Governments and central banks have between them created an environment of negative real rates. For example, retail price index inflation in the UK is above 5%. Yet the Bank of England has kept the bank rate at 0.5%. By the time they've paid tax, savers need to find a bank that pays more than 7%, just to keep up.

The result is that savers are being mugged by policy-makers. Money in the bank is losing its purchasing power, as the people in charge attempt to devalue the currency. Watching your savings shrink by the day isn't much fun. So people are being driven to find a more effective store of value.

Is it any wonder people are flocking to gold?

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What's driven the gold price to new dollar highs?

Higher interest rates are inevitable sooner or later. But, as long as this environment of negative real rates continues, gold will continue to rise. Many myself included have been looking for a sizeable correction in the market in order to get repositioned. You normally get one or two a year. But, since late 2008, even the slightest sell-off has quickly been met with buying. A lot of people want to get into this market.

It's worth noting that much of the rally we have seen over the past fortnight has largely been a function of dollar weakness. In euros and pounds, gold is trading a few pennies below the highs made on 7 June. So it's not that big a landmark. But looking at the bigger picture, gold, a currency in itself, is rising against all fiat currencies, as policy-makers worldwide debase them.

However, there are some divergences that suggest gold might soon suffer some sort of correction.

Three signs that gold may be due a correction

Firstly, June, July and August are typically weak months for gold. The summer often sees one of the best entry-points (i.e. a low) of the year.

Secondly, even after the rally of the past few weeks, gold stocks are still trading below the highs of December 2009 and March 2008. That could simply mean that the stocks are currently a better opportunity than the metal. But that divergence can often indicate impending nastiness. It certainly did in the spring of 2008.

Thirdly, gold's highs are also unconfirmed by silver, which, at $19 an ounce, is still 10% or so off the March 2008 high of $21.50.

Now, I'm not too concerned about silver's comparative weakness. Typically, the ratio between gold and silver falls during good times and rises during the bad. For example, between 2003 and 2007, when credit markets were at their most buoyant, the ratio fell from 80 to 45 (so it would have taken 45 ounces of silver to buy an ounce of gold). In other words, silver was rising in price faster than gold.

This happens because, unlike gold, silver is as much an industrial metal as it is a monetary one. Its comparative surge in price was due to the fact that this was a booming period of speculation. Silver does well in such an environment.

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What the gold/silver ratio can tell us about the wider economy

However, in periods of credit tightening, the ratio between gold and silver rises, as deflationary pressures cause money to move from speculative assets to stores of wealth. During the bust of 2008, that ratio quickly went from 48 to almost 85. In other words, silver slid in price much more quickly than gold.

Indeed some experts like to use this ratio as an indicator of impending stress or buoyancy in the credit markets. A move above 70 would tell us there's more trouble coming.

The chart below shows the ratio between gold and silver over the last ten years. As you can see, a clear uptrend has been in place since late 2006.

The ratio is useful as a guide to tell us when to move your gold into silver (above 80 on the ratio) and when to move your silver back into gold (below 50). But the current ratio of 65 is not necessarily warning of an impending correction in the gold price.

All in all, while the evidence is not conclusive, I'm not a buyer of gold here. I don't like to buy at all-time highs. But nor am I selling. We may see some sort of summer pull-back, particularly if stock markets turn back down. But, longer term, this bull market has further go.

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We were astounded by the number of reader responses to my Money Morning piece last week on the ratio of UK house prices to gold. In terms of readers' comments, it broke the record, previously held by Merryn for her piece on the minimum wage. I even had a irate email from my father on the subject. Not all the comments were particularly polite, but they did raise a number of legitimate concerns which I want to address here.

The idea was to look at the performance of the UK housing market relative to gold since 1968, and to show that from a peak in 2005, the average house price is down some 70%, even though in nominal sterling terms it is only sitting roughly 10% off its peak.

A number of readers seemed to think that making this point means that Moneyweek has somehow turned bullish on the property market. Not so. Everyone at Moneyweek has their own opinion, of course. But our editor-in-chief Merryn Somerset Webb is still a declared bear (read her latest thoughts on the subject here) and for my part I would argue that now is perhaps the worst time in history to be buying property.

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Property prices have only held up because interest rates have been suppressed to artificially low levels by policy-makers who appear to have decided that saving the banks, credit and housing markets is more important that saving the currency. Indeed devaluing our currency seems to be one of the strategies - albeit an undeclared one - for paying off our national debt.

But even in this environment of low rates, transaction volumes are below the levels set in the 1989-94 crash. House prices bear no relation to earnings, which, largely speaking, are flat or falling. They bear little relation to rental yield. Credit is tight. Estate agents report that more and more property is coming to market - and this is particularly the case since the abolition of HIPs. The threat of rising rates is lurking around the corner like a drooling bear - the OECD thinks UK rates should hit 3.5% next year. And of course the proposed rise in CGT, if it materialises, is going to send a virtual tsunami of buy-to-lets and second homes onto the market.

I think its pretty to hard for anyone to argue that I am somehow bullish about property, given the above.

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A number of readers also questioned the legitimacy of measuring one market in terms of another. You buy and sell a house in pounds, they say, so that is all you really need think about. But comparing the ratios between markets is a widely-practised and, in my view, useful strategy that can help us to gauge what is cheap and what is expensive in relative terms. Commonly used ratios are the share price-to-earnings ratio; rental yields vs house prices; wages to house prices; the Dow-to-gold ratio; commodity prices relative to commodity-producing companies; commodities vs stocks; stocks vs bonds, and so on. All these comparisons can serve a helpful purpose. Yes, the house-price-to-gold ratio doesn't take rental income into account but it is still an interesting gauge of relative value. And, given that there are so many people, many of them regular Moneyweek readers, that have rolled their wealth out of property and into gold, it is an extremely relevant one to our readership.

Gold is in a bubble, said others, so the comparison is invalid. Gold may or may not have got a little ahead of itself, but it is not in a bubble - not yet anyway. Merryn wrote on this subject just last week as well. To put things into perspective, here we look some recent bubbles. Below is a chart which overlays the Nasdaq bubble, the US housing market bubble and gold - you can see that gold has a way to go in its cycle before it hits full-blown bubble territory.

Others argued that there is no point comparing housing to something as useless and inanimate as gold; you can't live in gold bars, after all. I'm not going to get into the what's-the-use-of-gold argument here - if you read Moneyweek, you will know how we think about it - save to say that it is in part because of gold's relative industrial uselessness that it has so served so well as money for thousands of years. Unlike modern fiat currency, it is, broadly speaking, beyond the power of governments to debase (you can chip coins, but that is a different matter) and so it preserves its value.

That's not the case with Mars bars, something several readers suggested would be as much use as gold for measuring against house prices. I do not have the actual data. But, from memory, when I was a child in the 1970s, a Mars bar cost 5p. It now costs somewhere between 50 and 60p, depending on where you shop. That's a 1000% rise. That's not because Mars bars have appreciated in value, it is because modern money has lost and keeps on losing its purchasing power. It is the great fraud of our time. I think it is that stark revelation that upset so many readers.

These are incredibly frustrating times. A whole generation has been alienated by the absurdly out-of-reach property prices in this country. Many, having rightly identified that property was in a bubble, either stayed out or got out, only for the long-overdue correction never to fully materialise. Meanwhile, they see the purchasing power of their money evaporate, and it seems they will never be able to buy anything unless they cripple themselves with debt. This is all an unfortunate consequence of the modern fiat system of money and credit. It causes malinvestment, it creates rampant asset price inflation, booms, bubbles and, eventually, busts.

In response to all this there isn't much we can do other than move our wealth into stronger foreign currencies or an asset, such as gold, that a government can't debase. And there might be another opportunity to do that coming up in the next few months. There is a lot of turbulence dead ahead in global markets. Gold may well sell off in the carnage. If it does and we get our usual summer low, take advantage.

People keep asking me what is gold going to do in all this market turmoil?

I reply, frustratingly it could go either way. I know that's the most annoying of answers, but, really, it could.

There are so many opposing forces at work. So I'd like to consider some of them today

In the credit crisis of 2008, gold went down with everything else. Gold stocks were hammered as the world deleveraged. But gold and gold stocks were also among the first to rise from the ashes. They made their low in November 2008, while the major Western stock indices carried on declining until March 2009.

Gold was not the safe haven it was touted to be. However, this only reflects what was happening in the paper markets of stocks, futures and exchange-traded funds (ETFs).

In the 'real world', bullion dealers reported unprecedented activity. Such was global demand, that there was a Krugerrand supply crunch in South Africa; the US Mint was unable to supply gold and silver coins; and Tony Baird of Baird & Co, one of the UK's main dealers, confessed to me that he could have had ten times the number of people working for him and still not have had enough staff.

And something similar is happening again today.

Germans are buying up gold fast

The FT ran a story on Saturday, headlined: 'Germans lead gold rush frenzy'. It seems Germans are panicked by the inflationary implications of last week's €750bn eurozone bail-out. They have been buying up gold coins and small bars at a faster rate than during the Lehman bankruptcy of autumn 2008. Krugerrands are now commanding a premium of about 8% above the spot price of their gold content.

"We have some extraordinary sales to German customers," says Deborah Thomson, treasurer at the Rand refinery in South Africa. "The refinery," writes Jack Farchy in the FT, "which usually sells 2,000 coins to each customer at a time, says that last week it received an order from one German bank for 30,000 coins. Another bank requested 15,000 coins".

We seem to be threatened with another bout of deleveraging. But this time, unlike in 2008, gold has remained strong in the futures markets. In fact, it is sitting at a vital inflection point. Against the euro and the pound, both of which have been exceptionally weak, gold has gone near parabolic and has long since broken out to all-time highs.

Here we see gold against the pound. It costs nearly £850 an ounce it was just £570 last summer.

And here is gold versus the collapsing euro:

Against the US dollar, however, it is trading at or barely above the all-highs of December 2009 at $1,224 an ounce.

The futures markets are where the price of gold is, largely, determined.

If I was a futures trader and I'm not I would be long gold (betting on the price to rise) in the belief that it could easily go parabolic from here, as has happened in euros and pounds when it broke out.

But, assuming that I have enjoyed a nice run, I wouldn't want to give too much profit back, so I would also have my stops very tight, perhaps at just below $1,220 (near the old high). If not there, I might have them just a little lower, a little beneath the $1,200 mark.

Other traders might not think like me, but there is the danger, in my opinion, that just a small sell-off here could easily trigger a load of stops and drive the price down.

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Why would gold sell off?

But why would gold sell off, given the circumstances? Well, for several reasons. First, sentiment as demonstrated by the Germans is wildly bullish. It is hard to find a gold bear out there. That is often a bearish sign.

Second, gold's move has not been confirmed by silver. Silver, trading at $19 an ounce, is still $31 off its all-time high of 1980, and $3 or 15% off its more recent high of $22 set in spring 2008. I know silver has, for various reasons, a tendency to be rather, shall we say, errant, but like me at school, it should be doing better.

Third, gold's move has not been confirmed by the gold stocks. These are still trading below their highs of March 2008 and December 2009. Perhaps that makes them a buy here, but purists like to see gold stocks leading gold.

Fourth, open interest on the futures exchange is extremely high, with the commercial traders short a worrying 282,644 contracts. These are often levels concomitant with a top.

Now, I am not calling a top here by any manner of means. I remain wildly bullish about gold in the long-term and think we are eventually going to go back to some kind of botched gold standard as the only solution to this ballooning monetary crisis that just won't go away.

And in the event of 'another bout of 2008', I don't think gold will be hit so hard. What was a credit crunch largely in the private sector is now morphing into a full-blown sovereign currency crisis. That should be bullish for gold.

But as I noted above, there are some grounds for 'short-term concern', and it doesn't do any harm to be aware of them.

This small cap remains an exciting play

Finally, a number of you have written in and asked me about one of my tips, Sacre Coeur Minerals (CA:SCM), a small cap operating in Guyana. It has some extremely exciting hard rock assets which they are drilling, as well as some alluvial gold test production which should, once they get operations right, hopefully become commercial production.

The stock has slid in recent months, partly because of the slide in markets generally, but also, in my opinion, because of lack of dramatic newsflow. However, I spoke with chairman Irwin Olian last week and he remains extremely bullish about the company as you'd expect him to be. The geologists are excited about the hard rock we should see some drill results in the next few weeks and the alluvial test mining is progressing well, with the new equipment to optimise operations now on site.

For my money, Sacre Coeur remains an undervalued play in an exciting sector. If you're interested, you'll need a broker who deals in Canadian stocks. One more thing, these microcaps will spike if everyone rushes to buy at once, so offer a price and don't chase it up.

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Stock markets collapsed yesterday in dramatic fashion as credit rating agency Standard & Poor's (S&P) lowered Greece's credit rating from BB+ to BBB+. In other words, Greek debt is now officially junk (according to S&P at least, and the other agencies may not be far behind).

S&P warned that if Greece restructures her debt, bondholders could recover as little as 30% of their initial investment.

No wonder investors panicked. Yields on ten-year Portuguese bonds jumped 48 basis points (that's 0.48 percentage points), while Irish yields surged despite the widespread praise the country's enjoyed for its cutbacks. Both the euro and the pound fell against the dollar. Stock markets went into freefall, with the S&P 500 falling by almost 3%. Even my uber-bullish broker was buying puts.

The only thing to rise was the US dollar.

Oh, yes. And gold...

Gold hasn't been behaving like a safe haven

Gold is billed as the safe haven investment that people fly to in times of panic. But over the last ten years it hasn't really worked like that. Broadly speaking, since 2002, gold has risen and fallen with the stock and commodities markets. It has not been the 'alternative investment' it's made out to be.

In 2001 gold rose (from a multi-year low) as stock markets fell, but then in 2002 they synched up. Since then they have risen and fallen in tandem. They enjoyed bull markets from 2002 to 2007. They corrected together in May 2006. Gold carried on rising after the stock market made its top in 2007, but then both fell during the credit crisis of 2008.

Gold, however, did not fall by as much; it made its low earlier than the stock market (this is the action you'd expect from an asset that's in a long-term bull rather than bear market), but by March 2009 they were back in sync and rising together again.

But now it's finally doing what it's supposed to

But, yesterday, we saw something different. As Greece was downgraded, stocks collapsed but gold actually shot up, by some $25. It was finally doing what it's 'supposed to'.

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And it shouldn't be any great surprise. This is the perfect storm for gold. Unlike the 2008 credit crisis, where the problem was largely one of private debt and liquidity drying up, now the issue is sovereign debt. This is a different beast altogether. And the fear already seems to be spreading. Portugal is next. But are the finances of Britain or France or, for that matter, the US in markedly better shape?

In these circumstances, where's left for money to flee to? Gold's unique selling point is that it is nobody else's liability. That's what should make it an attractive buy when the world's financial system comes under this sort of stress.

It's also worth noting that other 'hard assets' such as oil, silver and base metals actually sold off yesterday. Gold and the US dollar were the assets that money fled to. I have pointed this out before. It is unusual, but it is possible for gold and the US dollar to rise together.

Did gold break free yesterday?

One day does not a market make, but there is a good chance that yesterday will mark a major change in trend. It could be a top in stock markets though I'm wary about making that call again. But if it is the day that gold finally breaks free, gold has to get above $1,170 an ounce and stay above that level, as the chart below shows.

Once we are through this resistance, gold can make an assault on its old highs and beyond.

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A number of you have asked for my latest thoughts on gold. In particular, you've been asking about my spring target of $1,400 an ounce. So I'd like to take a look at it this morning.

Let's be honest, in 2010 gold has been a bit of a dog. So have gold shares. Gold began the year at about $1,120 an ounce. Today it sits at around $1,110.

Gold shares, as measured by the index of unhedged gold miners, the HUI, are down some 10%. The HUI began 2010 at just below 450 and now sits barely above 400. The S&P 500, meanwhile, which began the year at around 1,130, now sits a few percent higher at around 1,170.

Worse still, in January's correction, gold and gold shares were hit harder than the stock market. And in the subsequent bounce, they have been laggards. This is not the action I would like to see. I would prefer some signs of leadership.

So what next?

Why you should still hold gold

Looking first at the longer term, I remain utterly convinced by the gold story.

I can't help but think that the credit-based, fiat monetary system under which we operate is going to end badly. Winston Churchill said, "All previous attempts to base money solely on intangibles such as credit or government edict or fiat have ended in inflationary panic and disaster."

Put simply, we have burdened ourselves with too much debt at almost every level of society, from government to corporate to individual. The simplest way out is some kind of currency devaluation.

Whether this is gradual, as we've seen over the past 12 months, (a pound buys you a lot less than it did a year ago) or comes in a sudden collapse, remains to be seen.

The former is more likely in my view. That has been the pattern of the last 100 years. Even house prices have been constant in sterling terms in 2009-10, although they have been falling if you measure them in foreign currency or gold. Indeed, with interest rates on bank accounts generally below the rate of inflation, saving sterling is a loss-making exercise.

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Given that most foreign central banks are pursuing similar policies, holding foreign currency is not particularly attractive either. That leaves gold. Indeed, despite a mediocre performance against the US dollar (which I turned bullish on in November) gold is actually up 5% this year against sterling. On 1 January it cost £700 an ounce. It now sits at £740. The chart below shows gold vs sterling.

So what about the $1,400 target?

This is late March, so unless we have a bonanza April it doesn't look like we're going to hit my spring target of $1,400. But let's not throw the towel in on this one just yet.

If you read my column regularly, you'll know that I arrived at this target based on a repeating pattern that gold has shown since 2001. It finds a low, usually in July or August, then embarks on a move up. This move often lasts some six to nine months, and ends in a blow-off top the following spring usually following a sharp 10% correction en route. There then follows a period of range trading which lasts some ten to 18 months, before the next move up.

Below is an illustration of the pattern I am describing:

Of course, there is absolutely no guarantee this pattern will continue to repeat. But it's useful as an exercise to see where we are in the scheme of things. Regarding this move, we had our summer low quite early in July as it happens then we had our break out above the old highs a little early too. That came in late September, rather than October. In December we had our nasty mid-move correction. So the pattern looked good for a repetition. In fact, we may still see $1,400 by May if we have another April like that of 2006.

However, this mid-move correction is continuing for longer than I'd like. Perhaps December was the multi-month blow-off top, and we are now in one of those extended periods of consolidation, when gold bulls can't understand why the price isn't rising with the fundamentals so strong. Perhaps I should be looking at April 2009 as the 'summer low', which would mean we've had our six- to nine-month up-move. We would now be in a period of range trading and consolidation.

It could be a positive that gold hasn't reached $1,400

Reluctantly, I have to admit this now appears to be the case. I'll give it until early May before I declare that target dead in the coffin. But if it's dead, that's actually positive.

I don't like to see gold going too far too fast, as it did in 2006 and 2008. The subsequent corrections are too violent and the consolidations take longer. If we are indeed now in a period of consolidation, it's not likely to last for that long, as the previous upmove was comparatively small.

What's more, it looks as though gold has found its low somewhere in the $1,060 to $1,080 area.

In fact, I see similarities in the chart between now and the 2002-3 upmove, which eventually became a lovely run.

To sum up, in the short-term, I'm quite bullish on gold and gold shares. The spring is often a good season for gold and there seems to be plenty of support just below $1,100. And in the long-term I am convinced everyone should own some. It's essential.

But for now, my spring target of $1,400 looks like it was, well, a little optimistic.

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George Soros is a man who has outwitted governments before. In 1992 he made more than $1bn by short-selling sterling, as the UK government was eventually forced to withdraw the pound from the European Exchange Rate Mechanism. So when he speaks, investors listen.

Last month, at the World Economic Forum in Davos, Switzerland, he declared that gold is "the ultimate bubble". Fears were quickly sparked that the precious metal would tumble.

Various writers, fund managers and investors worked themselves into a frenzy. Many jumped ship and within a week we were trading down to levels last seen in October, almost $1,050 an ounce.

But one canny investor, it seems, was buying. George Soros...

A fortnight or so after his "ultimate bubble" quote hit the headlines, it emerges that George Soros has actually more than doubled his investment in gold. He now owns some 6.2 million shares in the US-listed gold exchange traded fund, SPDR Gold Trust (NYSE: GLD), worth some $680m. His investment vehicle Soros Fund Management also increased its holding in the Canadian gold miner Yamana (LSE:YAU) .

If you are buying something, you want to get it for the cheapest possible price. If you are selling something, you want to get the most money for it. So an old market trick and I am not for a second saying Soros was doing this is, if you are buying, to talk a market down, and if you are selling, to talk it up.

You don't walk into a souk and say: "I'll tell you what, that mug is the nicest mug I've ever seen, the future is really bright for mugs, I'd like to pay you too much for it." Rather, you frown a bit, mutter about the shoddy workmanship and grudgingly offer a low price. Nor, if you happen to work in a souk, do you say: "Look at my carpet. It's really horrible, and what's more I've got loads of them, more than I know what to do with. Do you want to buy one?" Rather, you smile and declare that its weave is unrivalled. It's pretty basic stuff.

Why has the IMF announced it's selling its gold?

So you have to wonder why the International Monetary Fund (IMF) has told everyone that it's about to sell 191 tonnes of gold. Don't they recall that Gordon Brown did something similar at the start of this decade? By forewarning the market of his plans to sell half of Britain's gold, he succeeded in securing the worst possible price for our bullion.

The IMF is purportedly raising funds for its operations to help near-bankrupt countries. So it should want to get the highest price possible for its gold. Yet in announcing the sale beforehand (and I know there are probably all sorts of regulations saying it should) it is doing precisely the opposite of what a canny player, such as Soros, would do.

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Either it is making the kind of blunder that is typical of large, non-profit state bodies, or it is deliberately trying to knock the price down, as the Gold Anti-Trust Action Committee (GATA) would have us believe. Indeed GATA suggests that the IMF doesn't even have the gold to sell. "Where is it stored?" they ask, not unreasonably. But despite GATA's compelling arguments, I still find incompetence to be the more likely explanation.

Should we be worried about gold?

So should we be worried about the outlook for gold, if the IMF is selling another 191 tonnes? I don't think so. Let's take a look again at what Soros actually said in his "bubble" speech.

First he said: "When interest rates are low we have conditions for asset bubbles to develop." The past decade or so of rate-slashing and serial bubble-blowing by central banks has proved this point beyond doubt. Soros continues: "they [asset bubbles] are developing at the moment. The ultimate asset bubble is gold." Policy-makers are using exactly the same methods to get us out of this crisis as they used after the dotcom bust. But they are running out of bubbles to blow. Gold is about the only one left. I'm convinced that is what Soros meant by "ultimate". Particularly as he later added that when he sees a bubble, "I rush out and buy". It seems that's just what he has done.

And why wouldn't he? Gold is a particularly appealing investment, given that cash is being debased and pays no decent interest. This bull market is almost ten years old now. The bubble is, shall we say, at least partially inflated. But it is nowhere near bursting point. We are far from the blow-off top that usually characterises the end of a bull market. Soros seems to view things the same way. And even if you think his comments on gold were bearish, it's still probably best to do as he does, not as he says.

It's best to do as Soros does

You just need to look at the recent history of central bank and IMF gold sales to see why. When the IMF, which is the world's third-largest gold holder behind the US and Germany, sold its last tranche of 200 tonnes (to India), the gold price quickly moved up 15% from $1,040 to over $1,200. Looking at the bigger picture, since Gordon Brown's bottom-marking sale in 1999, the following decade has seen the greatest offloading of central bank and IMF gold in history. Here's what the gold price has done in that time.

So as far as gold goes, my money's on Soros getting his timing right, rather than the IMF. It'll be a rocky ride, but I don't think there's too much to worry about.

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A number of people have asked me - how can I be so bullish about gold and be bullish on the dollar? Surely one is the inverse of the other. They can't both rise together, can they?

Also, we've had quite a correction in the gold price since the highs of early December. Gold is off some 15%. So is my price target of $1,400 an ounce for gold this spring still a possibility?

I've had a lot of emails about these questions. So in today's Money Morning, I'd like to take a look at the prospects for gold...

Largely speaking, gold will fall if the US dollar rises and vice versa. But that's not a hard and fast rule. This chart below shows the fourth quarter of 2005. You can see that, broadly speaking, the two rose and fell together (the red line is the US dollar, the blue line gold).

There was a similar period in early 2009. So being bullish on one doesn't necessarily make me bearish on the other. What I am bearish on, however, is sterling.

Gold and cash look the most attractive places for your money

It's crazy to move all your wealth into one asset class. But when people ask me what to do with their money, it's so hard to answer. Stock markets look like they've turned down. We had a rally yesterday, but I can't help thinking it was no more than a temporary bounce. Commodities look risky at these levels. Real estate that's just a question of when, not if. Corporate bonds we've had the rally. Now's not the time to buy in. And who'd buy government bonds with so much sovereign debt risk?

So that leaves gold and cash, neither of which pay any interest (well, negligible interest in the case of cash). Right now, I think it's wise to own a healthy mix of the two.

But we all know the problems of our debt levels in the UK. Sterling suffered big falls in 2008, but like stock markets I suspect 2008 may have just been the beginning. The UK doesn't have Germany to bail us out.

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Looking at the chart below of sterling vs the US dollar, there is a trend channel in place (lightly falling) and sterling has slipped to the bottom of it. So it could rally here. But if it breaks below that channel ouch. $1.57 was a key low and we have broken below that.

But while sterling looks very risky in the short-term, the euro clearly isn't much better. As for the dollar, I'm medium-term bullish because I expect the next liquidity crisis to result in a rush to the reserve currency. But in the longer term that'll just result in governments printing more money. The yen is also flawed, with the Japanese government hugely indebted. So is it any wonder I advise investors to hold gold?

Will gold still hit $1,400 an ounce by the spring?

So what about my target of $1,400 gold by this spring?

I arrived at this target based on a repeating pattern that gold has made over the past five years or more. Gold makes an up-move of some six to nine months, usually from a summer low, followed by a year to 18 months of consolidation. Then another up-move begins. Roughly halfway through each up-move, we get a correction of around 10%. Below is an illustration of what I'm describing:

We may just have had the mid-move correction. But its rather lengthy duration is of concern. I suggested in a previous Money Morning (How high can gold go?) that an ideal scenario would be for gold to go back, test its old high around $1,030, and bounce off it.

We briefly retested it on Friday and gold bounced off it like a kangaroo. But any subsequent re-test must hold. If my spring target of $1,400 is to be reached, it's imperative that the $1,000 to $1,040 level is not breached.

As well as being the old high, this is the level at which India's central bank bought its 200 metric tonnes. Both technically and fundamentally, there is a great deal of support there. I imagine many traders will cover shorts between $1,030 and $1,050, while many others will have buy orders at those levels. But they will also have stops - i.e. they could sell again - just below $1,000. So the price could fall pretty quickly if $1,000 doesn't hold.

If it does hold, a second up-wave taking us beyond December's highs to around $1,400 is a real possibility, even with a strengthening dollar late 2005 proved that. But if it doesn't, we can forget that spring target for now.

Gold is tied to stock markets for now

Most gold bugs are very pro-free market and anti any sort of government interference. As gold was once a form of money that was to a degree beyond government control, they see it as a contrary investment to suit their own contrary natures. Their ideal scenario is to see gold and gold shares rising, while everything else falls, and currencies lose their purchasing power as inflation strikes.

But that hasn't happened.

Gold, for the time being, has largely been rising and falling with other assets, be they stocks, commodities or real estate. It is the US dollar that has been the contrary trade. Goldbugs are waiting for the time when gold de-couples and does its own thing. They may be waiting a long time.

The big moves in gold stocks in the 1930s came after 1932, when stock markets had finally bottomed and were rising. In 1979, towards the climax of gold's last great run, gold actually fell with stock markets in October and November. Gold made its historic high of $850 when the Dow was rising.

In 2008, it was the same. Gold fell with stock markets. Gold and emerging markets then led the subsequent bounce. The difference is that gold fell by less than stock markets and subsequently rallied by more. This post-credit bubble environment is favourable to gold.

This correlation is worth being aware of. What it means is that if stock markets capitulate here as they could well do then gold could well go down with them. If that's the case, then my $1,400 spring target won't happen. But on the rally out of the subsequent low, it will.

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Gold has had quite a correction since the elation of early December.

From a high of $1,226 an ounce it fell as low as $1,075 about 12.5% in just over two weeks. On one day alone it fell by more than $50, one of gold's greatest daily falls ever.

So is this just a healthy mid-move correction for gold? Or the start of something more serious?

Gold is behaving exactly according to the script

If you look back at gold's previous moves in this bull market, as I have noted many times before, you will see that gold has displayed a repeating pattern. It will move up for six to nine months, make new highs, suffer a nasty correction and then consolidate for a year to 18 months, before embarking on its next upmove.

At first glance this long-term chart looks like it has done nothing but go up for ten years.

But closer inspection reveals this repeating pattern that I describe above. Blue lines show moves up; green lines periods of consolidation.

What's more, each 'blue line period' ie the up-move suffered a whopping 10% correction midway through. These may not look like much when you see them on the chart below (red circles), but for short-term traders or for anyone using leverage (perhaps spreadbetting), they would have been extremely painful periods.

In other words, gold's recent correction suggests to me that it is behaving exactly according to the script of recent years. Its autumn burst from $1,050 to $1,220 reminds me of December 2005. That month, the gold price suddenly ran up by almost $80 from $460 to $540 (how cheap does that seem now?). It then corrected down to $490. After that correction it made its way to $730.

Canadian technical analyst Ross Clark of Institutional Advisers notes: "In the bull market of the past decade corrections have typically lasted 31 to 37 trading days, comprising an initial break of 13 (+/- 2) days and a recovery rally into the 22nd day (+/- 3)."

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Our 'initial break' from $1,026 which ended on 21 December at $1,075 lasted 14 days. Again we are on script. The 22nd day was yesterday and gold's recovery does appear to have at least temporarily stalled yesterday. So according to these repeating patterns, we should perhaps look for another fortnight or so of correction and consolidation before gold starts to surge again and we move on up to my spring target of $1,400. Pullbacks over the coming weeks might be an opportunity to take a position for anyone who does not yet have one.

So that is one technical picture for gold. The fundamental positives that gold is no government's liability, you can't print it, it's the oldest form of wealth in the world, governments worldwide are debasing their currencies and so on remain unchanged and still loom vastly in gold's favour.

Beware: repeating patterns could be derailed by a shock to the system

But I should point out that these are just repeating patterns. There is no guarantee they work. They just often seem to. Until they don't. That might sound ridiculous, but that, in my experience, is often the nature of technical strategies. Some work well for a period a few months or a few years, maybe and then, for no apparent reason, they stop working. So you have to find a new one.

And the grim state of the global economy means that it's perfectly possible that all of these repeating patterns could be derailed by another big shock to the financial system.

For example, stock markets could suddenly turn around and crash here. Lord knows the fundamentals are bad enough. (I don't think they will, by the way, though I am betting on the resumption of the bear market). As Mike 'Mish' Shedlock of Global Economic Analysis writes, there's a long list of potential tripwires:

Global imbalances are cropping up like weeds in places like Greece, Spain, Vietnam, Iceland, Latvia, and Lithuania.

There are massive property bubbles in China, Canada, the UK, and Australia.

Japan is in a foolish fight against deflation and sinking further in debt

Commercial real estate in the US is on the verge of bringing down hundreds of regional banks.

Cities in the US are under massive pressure because of unsustainable pension plan promises.

Global terrorism is on the rise.

How long this mess hangs together without a huge crisis in a major currency is the question everyone should be asking. Sadly, most are oblivious to the widening structural cracks.

Hold on to physical gold

Bearish although this outlook is, I have to agree with it. If there is a sovereign debt crisis or a crisis in a major currency, quantitative easing and any other government interventionist economics won't matter. There'll be another panic, just like 2008. And those lovely repeating patterns in gold will stop working. Gold will fall. At least at first.

But then, in the aftermath, it will go up. A lot. So as always, hold onto your physical gold. Gold will have its ups and downs that could easily make or lose traders a lot of money. But in the long run the gold price will go a lot higher before this bull market is finally over.

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We finally have our shake-out in gold.

After peaking last Wednesday at about $1,220 an ounce, the price has fallen almost $100 in just four trading days. Friday's capitulation - some $60 - was particularly ugly. It shows just how much speculative, hot money there is in the sector.

So what now?

Now is not the best time to buy gold

In the week to last Wednesday 7 December, almost $300m of call options (options betting the market will rise) were traded in the largest gold exchange-traded fund (ETF), GLD.

That is more than the entire call volume of the second and third quarters of this year in just five trading days. On Wednesday alone, trading volume in GLD calls amounted to almost 50% of what the market traded in the entire second quarter. That is a sign of extreme speculative excess. It is not the time for short-term investors to buy. At such extremes, you have to ask where are the next buyers going to come from?

The time to buy is when the put volume (bets that the market will fall) is at record highs. Or, as the Wall Street proverb puts it: 'When there is blood on the streets'. I daresay there will be just such opportunities again.

As gold plummeted on Friday, we saw around 80 million shares traded in GLD. That is the highest daily volume ever. Nor is a market falling on such high volume something to buy into.

The clues that a correction was coming were there. Gold stocks had lagged badly on gold's last move higher. Silver had also lagged. It had been many weeks since we'd seen any meaningful pullback. There was too much bullish sentiment and the position taken by the Comex futures traders (the 'smart' money) was also very negative.

What's driving gold's fall?

But what is driving the falls? Surely everyone can see the fundamentals behind gold? That may be, but short-term speculative capital does not care about long-term fundamentals. It is looking for quick gains and it appears to have driven gold into some kind of short-term, blow-off top.

As we head into year end, there are a lot of fund managers who will want to lock in their profits for the year. I'm afraid that means they will sell their gold and anything else they own that has done well at the slightest hint of a turn in the markets, because they will want to secure their gains (and their bonuses) on what will have been an excellent year. That's what we saw on Friday and why the market fell so hard, so fast.

In the short term, this does not bode well for any market except one. It may be that we are finally seeing the end of the 'Great Reflation Trade', this astonishing rally out of the crash. For the large majority, locking in profits will mean locking in US dollars. And we have repeatedly said that it's the US dollar vs everything else. If it rises, stocks will fall, commodities will fall even corporate bonds and UK house prices may start to fall.

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Keep your eyes on the dollar

Of course, the US dollar is being debased into oblivion by its issuer the Federal Reserve, of course it is undermined by America's gargantuan debt levels, but it is still the currency in which Mr Margin Call and just about everyone else demands settlement.

Despite the falls we have seen in the dollar since the spring, the longer-term channel up has held for now at least. This chart shows the US dollar index the dollar vs a basket of other currencies over the last four years.

If the dollar rallies back to the top side of the channel, we will see a level north of 90 and, correspondingly, we will see the proverbial blood on the streets in just about every other market.

Looking at the shorter-term chart of the dollar, we can also see it has broken out of its downtrend.

Remember the excessively bullish sentiment I described in the GLD options trading in the opening paragraphs? There has been just such extreme sentiment about the US dollar only in reverse, and for much longer.

Not only have there been extreme levels of pessimism - 95%, 97%, 98% bears, according to which survey you read - this negativity has been ongoing since the summer. In the four or five months since then, the bearish sentiment has increased, yet we are just three or four points lower on the index. The downside momentum, so forceful between March and June, has petered out, even although the negative sentiment hasn't. I would suggest that is bullish.

I remain of the mind that we are going are going to see gold at silly numbers one day. Even gold exploration stocks run by incompetent geologists who can't add up and have repeatedly diluted their stock after taking bad advice from unscrupulous investment bankers will trade like the tech stocks of the late 90s. But we are still several years from such a scenario. For now, we must keep our eyes on the dollar, which is due a rally.

This might be our healthy 10% shake-out in gold en route to a higher spring high (reaching my $1,400 spring target) or last week's huge call option position may mark an intermediate term top in gold. We shall see. Either way, I think this correction in gold has further to go.

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In my last two Money Mornings I have looked at the bigger picture for gold, so today I want to share a few thoughts on the shorter-term outlook.

Conditions are still ripe for gold to continue its advance upwards. But there is also scope for a sudden, sharp shakeout. Here's why.

Gold remains a great bet

As regular readers will know, I have a target price of somewhere around $1,400 by next spring. I have arrived at this target based on the repeating pattern that gold has displayed over the last decade. It tends to make a large, 50% plus move up, which lasts about six to nine months, and then consolidate for a year to eighteen months before setting off on the next move. The moves tend to start in the summer and peter out the following spring.

We saw just such a move from August 2005, which ended in May 2006 at around $730 an ounce. Gold then traded sideways for almost a year and a half, whipsawing many out of the market; but in summer 2007 it set off again from about $650 finally peaking above $1000 in March 2008. We then had another violent year with gold retracing almost all of its move at one stage, going as low at $680 an ounce in the liquidity crisis of autumn 2008.

Take a look at this chart from Bloomberg:

Gold appears to be midway through just such an upward move now, from its summer low in early July at just above $900 an ounce.

During all of gold's up moves, however, it is worth remembering that it experienced a couple of violent 10% corrections en route. In the 2005-6 move it hit a wall in late November 2005 at $540 an ounce and quickly fell below $500. It had a similar problem in the 2007-8 move at $850 an ounce falling back to around $775.

So, based on this pattern, I would expect a similar shakeout before a higher high in the spring. We have not had one yet. It might be that the Dubai debt crisis is the catalyst.

But short-term volatility is up

Gold's volatility on Friday was something to behold. It fell some almost $50 over 4% - in barely three hours, before recovering and ending the day with barely any losses. There are two very different interpretations of that move. One is that gold was displaying real strength and there are a lot of buyers waiting for any pullbacks to get into this market. The other is that gold was just 'filling the gap'. Often if a market gaps up or down during trading outside of US hours, it will go back and fill the gap before making its next move.

If the fears stemming from these Dubai debt problems are real and we are on the cusp of another liquidity crisis, then I would expect gold to fall, at least at first. Despite the fact that gold is a safe haven during times of stress in the banking system, there is also a lot of hot and speculative money pushing gold higher. Think how many private investors are holding gold through some kind of spread bet, covered warrant or leveraged ETF. There are an equivalent amount of hedge funds and other momentum-playing institutions at large in the futures market.

It will not take a lot to shake these people out. They are a different kind of player altogether to your long-term investor. It is, in part, these speculators who have pushed the price up so high, so fast in recent months, and if the trade reverses and stops get hit, they could easily push the market back down as fast. It is worth being aware of this, as it's too easy to get delusional about gold and its 'safety' value. I am not saying it will happen. I am just saying it could. Nothing goes up in a straight line.

What is driving the gold price now?

But once the crisis subsides if indeed it happens at all I would once again expect gold to be once again the first asset class to emerge from the ashes and the one to thrive most in the aftermath. Perhaps we need to go back and retest the old high at $1033 and for gold to find support there. That would give a nice symmetry to the chart and give us our 10% mid-move shakeout.

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Another point to note is that this last surge in gold is to a certain extent unconfirmed by the gold stocks and by silver. Although it is up 65% year-on-year, silver, at $18.80, is still some 11% off its high of $21 in March 2008. The gold stocks are also a few points off their March 2008 highs (and they unperformed in that move), while gold is some 20% higher. Goldcorp, for example, is seen by many as the market leader, yet it has only marginally taken out its September high. This divergence creates ambivalence in me. On one hand, it suggests that gold's move is unconfirmed and thus urges caution. On the other hand, it makes me want to buy more gold stocks and silver as they have more potential upside, just playing catch-up.

Here is a chart showing the ratio of gold to gold stocks as measured by the HUI (the Amex gold bugs' index the higher the ratio, the higher the price of gold shares compared to spot gold). Thanks to Nick Laird of Sharelynx for this. Sometimes the stocks lead gold and sometimes it's the other way round. There is no hard and fast rule, but many technicians like to see the gold stocks leading the way with gold in tow. At the moment, however, the ratio having peaked in September is falling.

But central banks are now becoming net buyers of gold. As we discussed last week, central bank buying has the potential to transform gold's bull market into a bigger monster altogether. Meanwhile, governments are debasing their own currencies to oblivion. I had one ranting but eminent City trader collar me at a party on Saturday night. 'Nobody's going to buy the dollar,' he said. 'All this bailing out and quantitative easing has just exposed the dollar for the great big sham that it is.' He has a point, though I expect he might be a little more careful in his use of language come Monday morning. But 'all this bailing out', as he puts it, is why the gold price is going up.

As the dollar falls, gold rises

On the other hand, flawed though the dollar is, another liquidity crisis will mean that people are going to have to buy it as a 'safe haven'. I spoke about this recently in Money Morning: Could the dollar be in a new bull market?

I know readers like strong opinion from their writers, but in the short-term I must confess to being in two minds about gold. If it goes down, I will look to buy some more. If it goes up, I may sell a bit. But, longer term, we are going a lot higher. And we remain on course in fact we are ahead of schedule for $1,400 by next spring.

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We had another good day for gold yesterday, as it climbed momentarily above $1,150 an ounce. The strength and speed of this move is surprising even me.

They say the hardest thing about riding a bull market is staying on. The bull will always try to throw you off. There are many who have not been as exposed to this move as they would have liked. Some have missed it altogether.

Now the bubble-callers are out once again. So today let's look at a couple of their most recent arguments and see if they carry any weight...

One of my definitions of a bubble is "a bull market in which you don't have a position". How many of those that say gold is in a bubble are acting out of resentment over the fact that they have missed the move? A fair few, I daresay.

Yes, gold has had a fantastic run and is starting to look overbought. But this is a bull market. Bull markets can stay overbought for long periods of time. Overbought readings show that money is moving into the market at a quickening pace. We have always said that gold is small market and when institutional money moves in it will quickly push things higher. That is what is happening.

Are adverts offering to buy your gold a sign of a bubble?

A number of people have pointed to the proliferation of adverts offering to buy your gold as a sign of a bubble and a top. I had an email from a young man of Essex saying there is one such institution loudly making this offer in his local shopping centre in Romford. I frequently pass a huge hoarding on Wandsworth Bridge.

But these companies are offering to buy your gold. They are buying gold off Joe Ignorant. It is when they start offering to sell you gold that alarm bells should be ringing. Joe Ignorant is selling his gold to them, because he doesn't know its potential. It is when Joe Ignorant starts buying that we are headed into bubble territory.

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I believe the model of these companies is to buy gold jewellery (which isn't pure, by the way - other metals are mixed in to make it harder. 24 carat gold jewellery is considered too soft). They pay below spot rate for the gold, melt it down and then sell it as scrap at closer to the spot rate which is moving higher every day. (Do please email me if you work for one of these businesses and let me know if I've described that model correctly).

How about a new gold mine in Scotland?

I had another email about Scotgold, an Australian company which is building a gold mine in Scotland, saying that if the gold rush has reached the Trossachs, this points to a bubble. Again I don't agree. Gold is a depleting resource. Like all resources, the easy-to-find stuff has been found and mined. Now it is being discovered in increasingly remote and unexpected locations around the globe. Oil was found goodness knows how many feet under the North Sea off the coast of Scotland. Did this mean oil was in a bubble?

There is (rightly) a lot of excitement about this mine because it's the first gold mine in Scotland for a very long time. But, in the grand scheme of things, it's a tiny mine, with a goal of producing 20,000 ounces by 2011. There was a similar story about a gold mine in Northern Ireland a few years back, owned by a company called Galantas Gold. There was a furore of excitement, the stock price popped and dropped, and the company has had barely a mention since. But they have quietly gone about their business and, having gradually overcome the inevitable problems that strike all miners, are now producing gold at a small profit.

If there's any bubble at all, it was in the press coverage of these mines, not in gold itself.

Gold's headed for a bubble, but it's not there yet

We've heard it all before. Gold was in a bubble two years ago when it hit $650 an ounce, and before at $500. Gold will hit bubble territory one day but we are not there yet. I have a number of long-term price targets, which I shall outline in a future Money Morning. This bull market, which began in 2001, is now some eight years old. We are beyond the stealth phase and into the awareness phase (see chart below from a previous Money Morning).

Institutions have woken up to it, investors have woken up to it but not all of them. We are not at the mania phase yet, there is no "new paradigm". That will come in several years' time - perhaps as governments and central banks start to talk about returning to a gold standard or similar.

Of course we could easily have a correction here. The bull market could easily throw people off yet again, and the US dollar is due a rally which would hurt gold. But gold is not in a full-blown bubble yet unless, that is, you are using my definition of the word: a bubble is a bull market in which you don't have a position.

We've more on gold, and how to buy it, in the current issue of MoneyWeek if you're not already a subscriber, subscribe to MoneyWeek magazine.

Before I go, here's a quick mention about The MoneyWeek Alliance. In case you haven't heard, the service a lifetime subscription to MoneyWeek plus all our best newsletters - reopened just over a week ago, but it's set to close its doors to new members tomorrow. So if you want on board, you need to apply now. If you're interested in test-driving the service for 30 days, find out more here.

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Gold climbed to another all-time high yesterday of $1,068 an ounce, before closing at $1,063. Goldbugs unsurprisingly are very excited.

But a correction will come. It always does. The question is: "When?"

Should you be taking on new positions now? Should you be sitting tight? Or should you be selling?

Today, I wanted to venture a few thoughts as to how high gold could go on this run. So let's try to answer some of those questions...

A number of technical analysts have been commenting this past year on the massive inverted head-and-shoulders pattern that has been building up in gold over the last year. This is a bullish chart pattern and usually comes at the end of a downtrend, indicating a reversal. It is rare, but nevertheless bullish to see it in an uptrend, as was the case with gold.

How high could gold go from here?

In order to see what is possible from such a formation when it breaks out, I ask you to look at this chart of junior gold miner Gold Resource Corporation (US: GORO). As you can see, by late-August it had made a virtually identical pattern to that of gold.

Then it broke out, quickly launching from $4.25 to $9.

Those last two charts look as though they are for two different companies, so significant has been the impact of the break-out. But it is the same company viewed just six weeks later.

Gold Resource Corp is an excellent company and has long been doing excellent work. It's one of the top if not the top companies in its class. But this was not unknown. Yet suddenly now that it's shifting, everyone wants a piece of it.

Gold is not dissimilar. Most market participants have an inkling as to why you should own gold. But not everyone does own it. As gold breaks out, suddenly there is a rush to buy.

I am not saying gold will double from here like Gold Resource Corporation. It's nothing like as volatile or as leveraged as a junior miner. But I am just showing what is possible from this head-and-shoulders set-up. Gold has broken out to new highs and, technically, there is no overhead resistance to stand in its way.

Beware the October correction

So how high will it go?

Bear in mind that October is a bad month for gold. Almost every year we get a nasty seasonal sell-off some time in October. That hasn't come yet and is due. A correction in stock markets would also take gold down.

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I have frequently commented that gold has a tendency to make up-moves that last some six to nine months and then consolidate for a year to 18 months. I believe we are a couple of months in to such an up-move. But even in these up-moves there are still nasty falls.

Looking at the 2007-08 move, gold rose from a summer low of $650 in August 2007 to $1,030 in March 2008 roughly a 60% move. There were a couple of stalls in October, but the first major correction did not come until November 2007. By then gold had moved from $650 to $850, a 30% move. Then there was a 10% correction.

Looking further back to the 2005-6 move, gold rose 70% from a summer low of $420 to $730 in May the following year. After a choppy October, its first major correction, also of 10%, came in December 2005. By then gold had moved from $420 to $540, also a 30% rise.

Let's use these previous moves as a template for the current move. The starting point was the summer low of $905 made in early July. A 30% move would take us to $1,200. So there's an argument that, even with a choppy October, we could see $1,200 before Christmas. But we'll also get the nasty 10% correction.

A 60% move from the summer low of $905 takes us to $1,448. A 70% move gives us to $1,538.

Of course, I reserve the right to change my mind as events unfold. It does not do any investor any favours to become too wedded to any single theory. But these are my targets for this move in gold. I always like to issue a disclaimer and today's is that rather too many commentators are noticing this biennial up-move pattern I have described. If too many people know about it, that might invalidate it.

Hold on to gold

But for now, I believe investors should hold on and enjoy the bumpy ride. There are some gold stocks that have shot up, while others have lagged. Traders might consider taking some profits on their winners and hunting out some laggards that have yet to move. (Explorers, which tend to move more, but later in the run, are starting to look very attractive now I'll have more on this next week). And those without any gold should buy some physical, even at these high prices. What do they say? 'Buy gold and wait. Don't wait and buy gold.'

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I watched Newsnight with great interest last night. Jeremy Paxman was reporting from the Conservative Party Conference in Manchester. The main concern of the conversation was George Osborne's speech and the 'controversy' of his proposed spending cuts. Then Jeremy went over to the markets.

"Go on," I thought. "Mention it."

"The FTSE closed up 113 points," he said. Nope. "The Dow was up 131 points." Big news, yes, but "The pound fell against the dollar". No surprise there. "Now back to the conference..."

Gold, the oldest currency on the planet, the one form of money that is not the liability of governments or incompetents, has broken out to all-time highs.

And it didn't even get a mention on Newsnight...

Gold: the best-performing asset class right now

We have had an amazing six months in just about every asset class, except the US dollar. Oil is up, copper is up, bonds are up, stock markets are up, even our miserable, doomed housing market is up. Yet most are way off their all-time highs.

Gold, on the other hand, is at record highs. It remains by far and away the best-performing asset class in this post-bubble environment, as I have repeatedly said it would be. And it didn't even get a mention on Newsnight. Not even a raised eyebrow from Paxman.

Champagne will no doubt have been drunk last night. But it will only have been on some dingy City back road or some tributary of Wall Street. A couple of coin dealers, a futures trader and a wizened old gold bug who remembers the 1970s will have toasted the currency of kings and staggered home with grins on their faces. But for the rest of them, this landmark will pass unnoticed.

It amazes me how many people are unaware of this market, let alone participating in it. What happens when they finally enter it? What happens when pension funds and investment trusts start buying gold?

I remain among my 'cleverer' friends (some of them owned Northern Rock) the eccentric who bought gold. I am still waiting for the day when they come to me asking for mining tips. Long may it be before they do so.

In any case, it's important to enjoy the moment we often forget to. But, come the morning after, as our wizened man from the 1970s will tell you, one would advise some caution. Gold has made a daily close at all-time highs, but we need to see a couple of weekly closes above this level to confirm things.

As I've often said, I still expect gold to go a lot higher in the longer term at the moment I expect $1,400 by spring 2010. But it won't get there in a straight line, and for now, the positions taken by the futures traders on the Comex suggest a top. If stock markets do turn down, they will take gold and gold stocks with them.

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Is the countdown really on for the end of the dollar?

However, it all depends on the US dollar. It has behaved in recent years as the inverse of everything else (stocks and commodities rise, the dollar falls and vice versa). Try as it may, the dollar has been unable to break out of its downtrend.

But now anti-dollar sentiment is reaching hysterical levels. One website is running a countdown to the end of the dollar now just over a month away, apparently. Even Middle East journalist Robert Fisk joined the fray yesterday when he reported in The Independent that the Arabs, Chinese, Japanese, French and Russians have been having secret meetings to trade oil in some alternative 'basket' currency.

How many times must we hear this? Last time it was Iran, and before that it was Venezuela. Meanwhile the Russians and Chinese are continually making noises about 'abandoning' the dollar. If the body you are buying oil from wants some other currency than US dollars and you only have US dollars, then you do a currency exchange. It takes a matter of seconds. What's the problem? Why all the scaremongering? I know a bloke on Oxford Street who'll do it for no commission.

Nevertheless this story did the rounds yesterday and no doubt helped along with the Australian interest rate rise give gold the impetus it needed to move above its old highs. Enjoy it while it lasts.

Just before we go, we have a guest columnist taking over Money Morning tomorrow. Dr Mike Tubbs explains his slightly controversial views on index tracking he thinks it's a waste of time. Instead, he urges private investors to take control of their own portfolios. But how do you pick stocks that will outperform? It's a problem that defeats most fund managers but Mike thinks he has the answer, and it's certainly turned out some great results so far this year. You can read all about it tomorrow.

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