Gold and Silver Historical Declines
Part 2 – Gold, Silver & The Barron’s Gold Mining
Index Historical Norms
21 August 2008
Hard to believe, but the 2008 corrections for precious metals and the mining shares have been rather sedate compared to historical patterns. To tell the story, Part-2 will be short on text and long on charts.
My first four charts are plots of data as published by Barron’s. However the data for gold and silver prior to the 1970s was provided by Nick Laird, proprietor of Sharelynx Gold. Nick has extensive historical financial data on gold and much, much more than anyone I know and all for a very reasonable fee. The data I use in my articles can be obtained from Sharelynx Gold.Com.
Precious Metals - Bull or Bear Market?
Below are three long-term charts for gold, silver and the Barron’s Gold Mining Index (BGMI). The BGMI is an index of large well-capitalized gold and silver producing mining companies compiled by Barron’s since 1938.
Since 2000, contemporary financial commentators have seldom recommended one of the most profitable investments of the past eight years - precious metals assets. More typically, they have warned of deflating commodity prices using gold and silver as poster boys for risky speculations. I find this situation very similar to industrial blue chip stocks in 1983. In 1983 the DJIA was approximately 20% above its last all time highs of 1973. See chart below.
Like the Dow in 1983, in 2008 we see gold and the BGMI sitting about 20% above their 1980 highs. Twenty five years ago, there were stock market bulls, but few if any market watchers in 1983 believed that there could be two years and 200% left to the stock market’s bull run.
With our 20-20 hindsight of history, in 2008, we can see that the Dow in fact had 24 years and 1,100% to go until its ultimate top in 2007. See chart below.
In 1983, blue chip stocks had a bad odor to them. Since 1964 (19 years) the Dow at 1,000 was an occasion for great expectation. However, as seen in the chart above from 1964 to 1981, the 1,000 Dow only delivered great disappointments. Business Week’s famous 1982 cover illustrated with Wall Street’s “RIP” tombstone was symptomatic of professional and retail investment expectations of blue chip industrial shares.
In August of 2008, a few facts should be kept in mind.
Market Fact #1: Market experts get paid for being experts, not for always being right. This doesn’t make them bad, they are just not always right.
Market Fact #2: No market trend (up or down) lasts forever.
Market Fact 3: The general equities bull market is an ancient market trend.
Market Fact #4: The future is always uncertain, but historically, uncertain times have always favored gold and silver.
While it’s doubtful that the Dow will ever return to 1000, what happens if the Dow should again reach the 14,000 level? Most likely the same if it should reach 15,000. After taxes, commissions and adjusting for inflation, the Dow even at 16,000 in 2010 is a losing investment in real terms. The Dow would have to be able to hit the 18,000 mark in two years to make it interesting to me.
But good luck to all that with these earnings!
The 30 companies in the DJIA is a very small sampling of the stock market. However the Dow’s companies are huge and international. The Dow Jones Industrial Average has not had negative earnings since the Great Depression. The S&P 500 Index (chart below) contains 500 significant companies whose operations span across the global economy. Note that both the DJIA and the S&P 500 earnings peaked in August 2007. We can see that since August 2007, corporate earnings have decayed as the credit crisis developed. To believe that future corporate profits are not somehow coupled to the problems in the credit markets is naïve.
All things considered, why shouldn’t investors consider other investment classes like precious metals and mining shares? The precious metals sector has been long neglected. Gold and the BGMI have cleared their 1980 all time highs by an insignificant 20%. Silver is still 50% below its 1980 highs. Demand for gold and silver, coins and bars are outstripping supply from mints and refiners. There are plenty of indications pointing to further upside for gold, silver and mining shares in the years to come.
How Far Can the Market Move Gold, Silver and BGMI
How high can the prices of gold, silver and mining shares rise? That depends upon how much paper money and bank credit the banking system creates. As trillions of dollars in credit assets crumble in people’s accounts, the desire for precious metals will only grow. Also consider the charts from Part 1 of this series. If the Fed continues it current “policy” of backing their cash with Wall Street’s trash, at some point the dollar will become an unwanted sub-prime mortgage derivative that won’t purchase anything of value.
As it looks now, the sky is the limit. But that is not the point of this article. We want to know how deep past corrections in the precious metals and mining shares have been. The next six charts tell the tale.
The first three charts plot gold, silver and the BGMI’s weekly closing price against their last weekly closing all time highs. Data points on the 0% line = new all time highs. Data points with negative % points indicate how far below that all time high a particular week’s value has fallen.
Note: Gold and silver prices were fixed by government policy for decades. As the Bretton Woods Accords broke down in 1968, I decided to use 1968 as a starting point for the metals. The BGMI data starts in 1938.
Note that gold, silver and BGMI had all time highs in 1980. Subsequently they fell to Great Depression levels that lasted for 20 years. Their resurrection from these extreme lows, without Wall Street sponsorship or the notice of “financial experts,” indicates that their current bullish trends are extremely strong.
Because the bear market in gold and silver from 1980 to 2000 was so prolonged and deep, using “the last all time high” as a reference omits important information within the 27 year crater from 1980 to 2007. To expose details from 1980 to 2000 muted in the above charts, I am shifting my reference from “last all time high” to “high of last 4 years” in the next three charts.
Using decades of market history, it is obvious that the precious metals corrections from March to August 2008 have been very mild in the face of huge negative publicity. This is very significant when we consider that from 1980 to 2000 we see huge price corrections in the face of public indifference. Yet one more sign of extreme strength in these markets.
Gold, silver and the BGMI may correct to even deeper levels in the months to come. But as the records tell us, gold, silver and the BGMI typically have very deep corrections in bull and bear markets cycles. Considering everything, I still see these markets as a strong buy even if they should pull back to 40% below their old all time highs.
Email this Article to a Friend 
Printer Friendly Version