Taylor On Gold
Gold Share Anxiety Rising
QUESTION: As I ponder the likelihood of a stock market crash occurring
sometime before the end of the first quarter of 2005 and I note the
lackluster performance of my holdings in mining stocks, my concerns mount.
I am sure many other subscribers feel much the same way.
I recall that you told a subscriber, who wrote to you expressing concern
about what a stock market crash would do to mining shares, that they would
also drop in value but that they would be quick to recover and then go on
to make major gains with the rising price of gold. You noted that the
likelihood of gains would depend to some extent on the progress ratings of
the mining stocks in question.
I think knowing two things would help me more effectively deal with this
situation, which I believe continues to grow more likely. First, it would
help a great deal to know what happened to gold and gold shares following
the stock market crash in October of 1987. How far did gold shares fall?
And how fast? How long did it take for them to get back to pre-crash
levels? How long did it take after that before gains became substantial for
gold shares? Which ones did the best? And the worst? How many mining
companies did not survive the crash?
In other words, it seems to me the more details we have regarding the
history of gold and gold share performance before, during and after a
previous stock market crash, the better we can plan for it happening again.
Knowing what to expect always helps to reduce anxiety.
The second thing that I feel I really need to know to make more informed
decisions about my share holdings is the level of debt these mining
companies are carrying. The first piece of information I look at these days
in a company's financial report is the debt/equity ratio. But this
information is not easily obtainable for many of these mining operations. I
feel that having this information is crucial in making effective trading
decisions, especially with the crushing debt liability all around us today.
These are very difficult times for those who invest in precious metals. We
need to work with relevant information of the highest quality in making
decisions regarding the safety and security of our mining stock
investments. All of your subscribers, including myself, are fortunate to be
able to turn to you in helping us to make these informed investment
decisions. Thank you, Jay,
Brent T.
EDITOR'S RESPONSE: Thank you, Brent, for your confidence in me. I only
wish I could be 100% positive that I have it all figured out.
Unfortunately, no mere mortal can really understand the markets, and if
he/she says they do they are delusional. Wise old market guys, like Richard
Russell for example, continue to emphasize that point. The realization that
markets are way beyond our control and even beyond our understanding is one
reason why I publish that passage from the book of James each week. About
all we can really do is use our God-given senses to try to best understand
what is happening and then be ready to make changes when the doors we try
to enter are no longer open. Despite disappointments in the gold shares
over the past year, I do not think the "gold share door" has yet closed,
though I agree your anxiety is not unusual or unreasonable. Actually, it is
very typical though of early bull markets. People remember the recent past
and have a hard time believing things have changed.
In fact, I think your desire to compare the behavior of gold in the
post-1987 era, which I as an old guy (57 years old) consider the "recent"
past, is not nearly as relevant to the current time frame as the 1930s. But
let's take a look anyway at how gold shares responded after the 1987 crash.
There are no junior gold share indexes that can provide good information
during that time frame. However, what I can do is provide you with annual
data for how our gold shares did subsequent to the 1987 crash. Following
are a table and a chart that show percentage gains for the Dow, gold, and J
Taylor's gold shares from 1987 through 1996:
Note that despite the drop in October of '87, the Dow actually posted a
modest 2.27% gain, gold gained 20%, and our junior gold stocks actually
gained a whopping 57.3%. From that data, it is hard to make a case that a
stock market crash is devastating for gold shares. Since these were all
bull market years, and because this period was during the Kondratieff
autumn, during which time stocks do very well and gold does very poorly, I
believe a study of how gold and gold shares responded to the crash of 1987
was not very relevant. As I recall, immediately as the stock market began
to melt down, gold started to rise dramatically and then within hours it
just as quickly began to fall from its automatic impulse to rally. I am
almost sure the plunge in gold following that devastating crash was an
orchestration by the Plunge Protection Team via the Exchange Stabilization
Fund (the President and U.S. Treasury can do this legally, without anyone
else knowing about it).
In fact as I have written previously, the crash of 1987 was a catalyst for
a new level of government manipulation in the gold markets, the equity
markets, and most likely the bond markets-which are used every day to
manipulate markets. Market manipulation is in fact inherent in our fiat
currency system, in which money is created out of thin air and used for all
manner of market manipulation. A system like the one we have is inherently
manipulative and the longer it runs, the more manipulative it becomes. The
only question is how long can Mother Nature be fooled for the benefit of
the ruling elite (banks)?
And here is where I think the 1930s model is more apropos to the current
situation than the 1987 model. In fact, we have been talking about the
skyrocketing debt relative to income. Because this chart is so useful in
making this point, let me show it once again. Note how rapidly debt is on
the rise compared to income. But also note how much debt has risen since
1987 relative to income. As Ian Gordon points out, during the Kondratieff
autumn (which is what we were in during the 1987 stock market crash), debt
grows very rapidly and stocks keep on rising. Had the authorities allowed
the stock market to melt down entirely, the K-winter could have begun at
that time, in which event, it would have been much milder than it is going
to be when the policy makers finally lose control of it, as they did in the
1930s.
How did gold stocks perform in the 1930s? We have Homestake Mining Company data available that answers that question. Here it is from 1927
during the time the stock market bubble of the 1920s was reaching its climax, through the tough days of stock market crash of 1929 and the
aftermath of the Great Depression.
From an investment point of view, $1,000 invested in the Dow at the start of 1927 would have managed to gain back everything it lost plus $56 by 1934.
However, $1,000 invested in Homestake Mining shares would have grown to a whopping $7,968 by the end of 1934. But the gains were even bigger than this if you stop to consider that the dollar gained value during this time! That is, because of deflation, a dollar purchased more by the end of
1934 than it did in 1927.
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