Tuesday , 21 May 2024

Silver & Gold Investors: You Can’t Predict a Stock Market Crash, But You Can Prepare For It – Here’s How

When the topic of a stock market crash comes up, The #1 question we get from gold and silver investors is this: “If we have a stock market crash won’t gold and silver crash, too?”…We don’t know how big a crash might be, and we don’t pretend to know the timing, but let’s look at the best ways for gold and silver investors to prepare for this likelihood.

The Historical Record

While no two selloffs are identical, the best clue we have about how gold and silver might perform in the next crash is how they’ve performed in past crashes. Below is a table of the S&P 500’s nine biggest crashes since the mid-1970s, and how gold and silver performed during each. The green boxes mean they rose, yellow means they fell but less than stocks, and red signifies they fell more than stocks.

Gold & Silver During Stock Market Crashes

The historical record suggests that one can’t assume gold will fall in a stock market crash. The exact opposite has occurred much more often.

  • On average, gold has risen during stock market crashes: twice it fell but less than stocks, and only once did it fall more than stocks…

Silver, on the other hand, has not fared as well.

  • Silver rose in only one of the S&P selloffs and was basically flat in another one as a result of silver’s high industrial use (about 55% of total supply) and that stock market selloffs are usually associated with a poor or deteriorating economy.
  • Silver fell less than the S&P in all but one crash, however, and this is significant when you consider how volatile silver can be.

There’s been other research on this topic, too. The World Gold Council did a correlation study on the degree of stock market selloffs and gold’s response and found that the bigger the stock market crash, the more gold rises!

Gold Tends to Rise More When Stocks Drop Sharply

The overall message from history is this:

  • Gold has risen during stock market crashes more than it has fallen. Silver usually doesn’t rise, but on average has fallen less than stocks.

There are many great benefits to physical gold and silver, and one of those is that they’re largely uncorrelated to other investments. In other words, when one goes up, the other tends to go down. This makes sense when you think about it.

  • Stocks benefit from economic growth and stability,
  • while gold benefits from economic distress and crisis.
  • If the stock market falls, fear is usually high, and investors typically seek out the safe haven of gold. This doesn’t mean gold will automatically rise with every downtick in the stock market. In the biggest crashes, though, history says gold is more likely to be sought as a safe haven.
  • [Therefore,] if you sell your bullion in anticipation of a crash, you could very well lose one of your best shields against that crash…

How Gold & Silver Investors Can Prepare For a Stock Market Crash

1. Hold. In other words, don’t sell in anticipation of a stock market crash. Hold through it.

  • Plus, what if you sell and the stock market doesn’t crash for another year? You could lose out on potential gains from your metals.
  • Another reason to consider holding is that numerous studies have shown that 90% of traders ultimately lose. What makes it tough is the timing; even with lots of fancy tools available one never really knows when to pull the trigger. Are you confident in your market timing abilities?

I look at it this way: I’m holding for a bigger payday, even if there’s a temporary downdraft. By focusing on the big picture I have less concern about a selloff in gold and silver becoming permanent. I thus plan to hold what I have through any stock market crash…

2. Build Cash. A selloff in gold and silver is always possible, even without a stock market crash. One way to blunt any pullback is having a healthy stash of cash which gives me the ability to power through any correction that might come, as well as the ammunition to take advantage of it if I wish. If you’re someone who worries about price corrections, having a meaningful amount of cash set aside might help.

How much cash? My personal answer is this: enough to buffer my portfolio if a crash does come, but not so much that I don’t profit if there isn’t one.

Holding my bullion and building cash is my two-pronged strategy: cash allows me to buy more if we do get another big decline in gold and silver, but also be positioned with my existing stash of bullion in case the next crisis sends them off to the races.

There’s one more solution…

3. Dollar Cost Average. Dollar cost averaging is a proven strategy. It takes emotion out of the equation, and it avoids “bad luck” timing – if you buy all at once and the price falls, you’re stuck – but if you buy in tranches, you automatically take advantage of downdrafts….

When Will the Stock Market Crash?

Nobody knows that answer. The Fed and other central bankers remain highly accommodative, but there’s no denying the market is overvalued, and nothing goes up forever. Perhaps the wisdom of Pericles applies here: “The key is not to predict the future, but to prepare for it.”…I hope this article helps with your preparations.

Editor’s Note:  The above version of the original article by Jeff Clark, has been edited ([ ]) and abridged (…) 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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