Gold and Silver? - Jeff Clark, Senior Precious Metals Analyst


If the Stock Market Crashes, What Happens to Gold and Silver? - Jeff Clark, Senior Precious Metals Analyst

We received a lot of queries asking if it would be better to wait to buy gold until after the stock market crashes.

After all, Mike has warned that a stock market crash is likely. Given what happened to global markets from the Brexit surprise, it’s a timely question.

And if the market takes a dive, many investors think gold and silver prices will fall, too.

If so, wouldn’t it be better to wait to buy them until after the dust settles?

Probably the best way to answer this is to look at what’s happened in the past…
 

The Message From History


I looked at past stock market crashes and measured gold and silver’s performance during each of them, to see if there are any lessons we can learn.

The following table shows the eight biggest declines in the S&P over the past 40 years, and how gold and silver responded to each.
There are some reasonable conclusions we can draw from this historical data.
 
  1. In most cases, the gold price rose during big stock market crashes.Notice this was regardless of whether the crash was short-lived or stretched over a couple years. Gold even climbed in the biggest crash of them all, the 56% decline that lasted two full years in the early 2000s. It seems clear that we should not assume gold will fall in a stock market crash… just the opposite has occurred more often.

    The reason for this is because gold generally has a negative correlation with the stock market. In other words, when one goes up, the other tends to go down. Which makes sense… if the stock market falls, fear is usually high—and investors typically seek out the safe haven of gold. If stocks are rocking and rolling, the perceived need for gold from the mainstream is low.

    You’ll recall gold did fall in the initial shock of the 2008 financial crisis. But while the S&P continued to decline, gold rebounded and ended the year up 5.5%. Over the total 18-month stock market selloff, gold ended that period up over 25%. The lesson here is that one should not panic if gold temporarily suffers from a stock market collapse. And of course see it as a buying opportunity.
     
  2. Gold’s only significant selloff (-46% in the early 1980s) occurred just after its biggest bull market in modern history. Gold rose over 2,300% from its 1970 low to the 1980 peak… so it isn’t terribly surprising that it fell with the broader stock market at that point.

    We have the opposite situation today. Yes, gold is up roughly 24% year-to-date, but we’re still coming out of a punishing four-year bear market where the price declined by as much as 45%.
     
  3. Silver did not fare so well during stock market crashes. In fact, it rose in only one of the S&P selloffs (and was basically flat in another one).

    This is likely due to silver’s high industrial use, and that stock market selloffs are usually associated with a poor or deteriorating economy.

    However, notice that silver’s biggest rise (+15% in the 1970s) took place amidst its biggest bull market in history. It also did not decline during the financial crisis period of late 2007 to early 2009, which was its second biggest bull market. In other words, we have historical precedence that silver could do well in a stock market crash if it is already in a bull market. Otherwise it could struggle.
The overall message from history is this: odds are good that gold won’t crash if the stock market does. Silver might depend on whether it’s in a bull market.
 

What if the Stock Market Doesn’t Crash?


We have to consider another scenario: what if the stock market doesn’t fall off a cliff?

Or what if it’s just flat for a long period of time? The 1970s (through 1980) saw three recessions, an oil embargo, interest rates that hit 20%, and the Soviet invasion of Afghanistan.

Look what the S&P did during that turbulent period, along with gold.
The S&P basically went nowhere during the entire decade of the 1970s. After 10 years it was up a measly 14.3% (excluding dividends and commissions). Gold, on the other hand, rose from $35 per ounce to its January 21, 1980 peak of $850, an incredible 2,328%.

In other words, gold’s biggest bull market in modern history occurred while the stock market was essentially flat. That’s because the catalysts for higher gold weren’t solely related to the stock market—they were more about everything else going on at the time. We have to allow for the possibility that this happens again: citizens are drawn to gold due to other pressing concerns besides the performance of the S&P.

I’m not suggesting there won’t be a stock market crash. Odds are better than 50/50 that’s what we’ll get. But if we do, history shows that gold may not crash with it. Or it might fall only temporarily. Or we might not get a crash at all.

For these reasons, I think it is wise to own a good chunk of gold now.

Anything can happen when markets are hit with extraordinary volatility. But consider all the risks we face today… do you really want to be without gold right now? I don’t.

Perhaps the ideal solution is to have a stash of cash ready to deploy if we get another big decline in precious metals—but also have a stash of bullion already set aside in case the next crisis sends gold off to the races.