first majestic silver

Gold Stocks vs. Dow Declines

July 7, 2001

In last week's issue, we showed you what happens when the Dow declines 10% or more compared to the XAU. Our conclusion was that each time the Dow declined 10% or more, the XAU, and therefore the gold stocks, went down a greater percent and for a longer time period.

"Yes, but, but …this time, it will be like it was before 1980 … like the last bull market in Gold. In those days, when the market went down, Gold went up."And so the numerous challenges went this past week.

We knew it was only a matter of time before someone pushed us to take a look back before 1987, and so this week, we made the trip - all the way back to 1975.

What did we find? Does our conclusion, that when the market goes down, gold stocks do also, hold up in Gold bull market times?

Should we still expect that if the general stock market tanks, the gold stocks will too?

First, how did we set this study up? Our comparison was between the Dow and declines of 10.0% or more, and the Philadelphia Stock Exchange Gold/Silver sector index - the XAU. We found that the XAU began trading on 12-19-1983. Our XAU data base starts on 05-15-1984.

The Dow declined -16.70% in 1984, but the decline began in January of 1984, so we kick in our Dow-XAU comparison on the next trade, which doesn't begin until 09-05-1986.

Our Gold data goes back to 12-31-1974. We don't remember when Gold began to trade, but we start with what we have. The first Dow decline of 10% or more, after our Gold data availability, is 07-15-75 to 08-21-75.

Our comparative study covers a range from 07-15-1975 to 06-22-2001. We have taken each Dow decline of 10% or more and compared the performance of Gold (1975 to 1984) and the XAU (1986 to 2001) during as like time periods as possible to the Dow declines. During this period, there are a total of 25 Dow declines of 10% or more. We have put this article and all the trade data relating to it on our website. Go to the home page, click on A Recent Issue & Article Archive. Click at the bottom of the page for Archives.

Below are our figures in summary and all the actual trades. Here is what we found: There were a total of 25 Dow declines of 10% or more. Of the 25 declines, there were two times when the Dow went down more than 10% and Gold went up.

Of the 23 remaining trades, 22 of 23 times, either Gold or the XAU went down more than the Dow did. Worthy of note are the 5 Dow declines on the way to the January 1980 price top in Gold.

Three of the five Dow declines caused Gold to decline as well. This was in the heyday of the Gold bull rise.

Our conclusion basically remains the same. Over the past 26 years, we observe that when the general stock market, defined in this instance as the Dow Jones Industrials, declines 10% or more, gold stocks decline a greater percentage over a longer period of time.

The reason this is important is that the myth of "stock market down, gold stocks up" still resides in the minds of investors.

Our general cyclic analysis, in our weekly Dear Dow letter, shows the stock market is vulnerable. Possibly a Dow Jones Industrial decline from the current 10600 level to Dow 7000.

If it happens, we are concerned that it will take the gold stocks down with it. You think this time it will be different? We're betting on history.

Following is an example of our data compilation for the entire period:

Dow Declines of 10% vs. Gold and XAU
07-15-1975 to 06-22-2001

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