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…[This article takes] a look at the severity, duration, and recoveries [of physical gold and silver] in three periods that seem to most resemble what’s happening today: the Great Recession, the 1970s, and the Great Depression to see what we can learn.
…There have been many periods in history where…[gold and silver] have crashed. The reasons vary, as does the severity and duration, but…[it is important to remember] that they always recovered. The only issue is how long the process took and how high they ultimately went.
The 2008 Financial Crisis
…The worst of the stock market crash occurred in October 2008. Gold and silver fell hard then too, largely for the same reasons as now, a desperate need for liquidity.
Here’s what that looked like for gold:
As you’d expect, silver’s decline was even bigger:
…Here’s what happened next:
…Silver did even better.
…The message from this Great Recession is that gold and silver can crash in sudden market shocks but…those shocks can draw investors into gold and silver, eventually resulting in much higher prices. In other words, once the initial shock wore off and forced margin sales eased up, investors rushed into gold and silver and pushed up their prices.
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The 1970s decade was tumultuous: runaway inflation, soaring unemployment, crashing stock markets, an energy crisis, and the Russian invasion of Afghanistan, and gold and silver crashed in the middle of all that. It surely seemed counter intuitive at the time…just like today…[that] they weren’t acting like a safe haven.
Here’s what the crash in gold looked like in the mid-1970s:
…This decline was doubly peculiar, because it started almost immediately after U.S. citizens were permitted to own gold again (January 1, 1975). That must’ve puzzled a lot of investors who thought it would rise in response to the new law—surely demand for gold would increase, right?
Here’s what happened to silver:
While silver fell slightly less than gold, the decline lasted longer and, as usual, the price was more volatile…but the selloff didn’t last. Despite any investor confusion at the time, as the crises wore on and investors kept buying gold and silver, the reversals were huge.
Gold bottomed in late summer 1976. Then this happened:
…Here’s how silver performed after recovering from its crash:
The price rose over 9-fold, over a period of about four years. Like gold much of that rise occurred in the final year.
The lesson here is similar to the 2008-2011 period. Precious metals crashed in the initial shock to the economy and markets but they rebounded spectacularly as more and more investors sought them out as a safe haven. Those that held on, despite any confusion over the initial crash, were handsomely rewarded. The wait was worth it.
The Great Depression
You might wonder why we’d look at the Great Depression, since not only was the gold price fixed with the U.S. on a gold standard, it became illegal to own with Roosevelt’s decree in April 1933 but what US investors could own was gold stocks. They became the proxy for gold since they couldn’t own the metal itself.
Here’s the total performance of the two largest gold stocks vs. the Dow during the span of the Great Depression.
From 1929 until January 1933, the shares of Homestake Mining, the largest gold producer in the U.S., rose 474%. Dome Mines, Canada’s largest producer, soared 558% – this while the Dow lost 73% of its value…[and if] you…[had] bought both stocks 5 years earlier ( at half their 1929 price) five years earlier…you would…[have had] gains of around 1,000%.
…[In addition,] both companies raised their dividends during the Great Depression; Homestake’s dividend went from $7 to $15 per share, and Dome’s from $1 to $1.80. Part of the explanation [for that] is that miners had a guaranteed selling price (since the price was government-fixed), which benefited them because their operating costs were falling…
If we pull back and look at the bigger picture, Homestake outperformed common stocks for an incredible 15 years.
From 1925 to 1940, Homestake shares rose 10-fold, while the Dow basically went nowhere…[In fact,] during the worst part of the crash, where the Dow lost 89% of its value, this gold stock more than doubled in price.
We’re not seeing that yet, of course, and we don’t know exactly what an untethered gold price would have done during the depression but, given the only way to own gold at the time was through gold stocks, this shows that once this rout in forced liquidation is over, gold could easily rebound.
Are Gold & Silver Done Falling?
No two selloffs or recoveries are the same. This one will have its own DNA, too, but as these three major crashes show:
- Gold and silver eventually responded to the crisis of the time. In all three instances, prices ultimately soared and this occurred during periods of both inflation and deflation.
While gold and silver both tend to do better in inflation, they ultimately rose in response to crisis which, of course, is what we have on our hands now.
History says that despite the current selloff in gold and silver, the crisis will draw in more and more investors and as a result, eventually impact their prices in a major way.
…[It is important to note here that this] is not about investment demand for gold and silver but about monetary demand. With the extreme monetary actions being taken now, monetary issues will almost certainly overwhelm central bankers, politicians, investors, and citizens. This reality, once it begins to play out, will push investors into gold and silver like we’ve never seen before.
Editor’s Note: The original article by Jeff Clark has been edited ([ ]) and abridged (…) above for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.
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