(Kitco News) -- Equities may be the key to the direction in gold over the next several months, traders say.          

With the economy still sputtering, stocks could have trouble making substantial headway. If so, investors could keep turning to gold for a place to park their money.          

“A lot will have to do with what goes on in the stock market,” said one New York desk trader. “As an asset class, the long-term story is the gold market is going to benefit from the fact that people are going to shun these paper assets and things like real estate.”          

Gold has benefited from the softer tone in the economy, said Stephen Platt, senior account executive with Archer Financial Services. Whereas there were hopes for a recovery several months ago, now many observers wonder whether the economy has any legs. This has limited the alternatives that many investors are willing to consider, Platt said.          

“Gold is the investment of last resort, or at least some place to park your money in this kind of an environment, where you can actually feel somewhat secure that at least you won’t lose value,” Platt said.          

The Dow Jones Industrial Average closed Thursday at 10,271.21, down from an April peak of 11,258.01. Meanwhile, December gold on the Comex division of the New York Mercantile exchange hit a seven-week high of $1,239.50 an ounce.          

Platt said equities may “not go anywhere” but remain volatile. If so, he said, “people have to find other investment alternatives. And gold benefits in that kind of situation.”

Meanwhile, the “opportunity cost” of owning gold is also low, since investors who park their money in the yellow metal are not giving up much in the way of other returns, as is the case when interest rates are high, Platt said. Certificate of deposit rates are only a percentage point or two and the yield on 2-year Treasury notes fell to a record low of 0.47% Thursday.

Afshin Nabavi, head of trading at MKS Finance, said a number of investors sold to liquidate gold positions during a pullback earlier in the summer. Many are looking for more confirmation on whether to re-establish gold positions, and stocks and the dollar will be among the keys, he said.

“Investors are always looking for the best opportunities,” Nabavi said. “One day up and one day down (the recent trend in equities) is not what the investor is looking for. They need something more stable.”          

Gold volume has been light lately because of the late-summer doldrums. “Come September, we may see more interest coming back into the market,” Nabavi said.          

A New York trader commented that the ratio between the Dow Jones Industrial Average and gold has been narrowing for some time, which reflects an outperformance by gold. Both near the same level when gold hit record highs in the $850 neighborhood back in 1980, he said. But by 1999 to 2000, the ratio had the Dow around 43 times higher than the yellow metal. This ratio “has been collapsing since,” the trader continued, pointing out the Dow is now around 8 times the price of gold.

Gijsbert Groenewegen, managing  partner of Silver Arrow Capital Management, suggested that the strong bond market may run out of upward momentum simply because interest rates are already so low that investors may seek something else. As the price of Treasurys rise, the yield declines. The yield on 10-year Treasury notes stood at 2.56% late Thursday.          

Should there be a sell-off in paper markets, Groenewegen said, investors might initially park funds in U.S. dollar money-market accounts. But eventually, he said, many are likely to turn further to gold.          

“In the long run, gold, agricultural land, fertilizers and water are the ultimate investments,” he said.          

Craig Ross, vice president of ApexFutures.com, said that gold has held up so well for so long that it’s possible it will keep rising no matter how the stock market performs.          

Currently, he said, there is a mindset that investors are looking toward gold to avoid risk in a soft economy. Yet, not many months ago, optimism about a recovery was supporting demand prospects for commodities generally, and gold was tagging along, he said.          

“Gold can’t lose either way, it seems,” Ross said. “It may just be going on technicals more than fundamentals. Or…no matter what fundamental you throw at it, people are making an argument that ‘because of this, it should go up.’”          

Still, he said, gold may benefit most from another large downward correction in the stock market.          

“We believe the poor-economy folks more than we believe (those who say) the economy is doing well,” Ross said. “So we think that is going to lead the stock market lower, and that is going to help out gold.”

By Allen Sykora of Kitco News; asykora@kitco.com

Editor’s Note: Meet the Kitco News Team at the upcoming Kitco Metals eConference September 12-13, 2010. A not-to-be missed event featuring Ron Paul, Marc Faber and other industry heavyweights. The eConference is free with Pre- Registration www.kitcoeconf.com.