It's no secret that, based on my analysis of the U.S. economy, I'm a dedicated, even determined, gold bull just now.

But as much as I like gold, I like the higher-quality gold shares - especially the Canadian-traded junior explorers - even more. For the simple reason that history and the brokerage statements of subscribers to our monthly International Speculator newsletter attest, when gold runs, the junior gold shares howl.

Given my strongly held views, the inevitable pullbacks in gold and gold shares amount to nothing more than yet another buying opportunity... which, I can assure you, I take full advantage of.

But for many investors, especially those new to the sector, the tottering U.S. stock market and the corresponding swings in gold of late, may give rise to the question "Just how well will gold shares hold up in a steep sell-off of broader equity markets?"

David Galland, Managing Editor of our International Speculator concisely answers that question below. In addition to reassuring those of you with an interest in gold, his findings should serve as an important reminder that the really big returns will come to those willing to be bold when everyone else is timid... and, in time, timid when everyone else is bold.

Doug Casey

Gold, like all the major financial markets, has been on something of a wild ride recently.

While here at Casey Research, we remain extremely bullish on gold, it is important, even critical, to keep in mind that bull markets make anyone on the right side of the trade think they are smarter than they actually are.

Consequently, it is when things are really going in your favor - as they have these many years now for anyone early into gold -- that you have to be most on guard, because pride really does come before the fall. For proof of that contention, just think of those people you know who were profitably early into the dot-com bubble but failed to sell when the selling was good.

So, being on guard, I thought it worth revisiting the question of how gold stocks perform in a broader stock market crash.

As you can see from the chart below, while gold stocks and the broader markets, represented by the S&P 500, can move together, they can also move in distinctly different directions.

Look especially at the time period around the last big stock market meltdown in 2000.

While there were spikes in the volatility of gold stocks during the period, the general trend for gold stocks was solidly up... at the same time that the general trend in broader stock indices was decidedly down.

It is also worth noting that while the market suffered a solid thwapping (a technical term meaning a hard slap up the side of the head) during this period, the thwapping was not related to a monetary crisis, nor even any particularly dire economic fundamentals, but rather the panicked unwinding of a speculative bubble in dot-com stocks.

By contrast, the crisis now closing in on us is all about a monetary meltdown... a set-up that can only favor gold. Even so, the picture above paints a pretty clear picture of gold's - and gold stocks' - role in a market crisis.

Sit tight, and you'll be more than alright.

David Galland is the managing editor of Doug Casey's International Speculator newsletter, now in its 27th year, dedicated to bringing investors unbiased research on investments with the potential for 100% or better returns over the coming 12-month period.

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