I'm not So Sure…

April 9, 1998
Founder & Chief Editor of Gold Eagle

In a recent posting to a Gold Chat Group, someone asserted:

"In my opinion, the budding gold bull is too embryonic to withstand a general severe market crash. The theory that "investors would flock to the safety and traditional security of gold" in such an event does not hold water."

"If a severe stock market crash came within the next few weeks, gold stocks would go down too. Even if bullion were higher than it is today. In 1987, a peak in bullion prices did not prevent gold shares from giving back in a week most of their bull advance over the past year and a half. In 1929, when stocks tanked, EVERYTHING went down for 3 years. Gold and silver miners did not respond with huge gains until four years after the crash when government devaluation of paper money, and confiscation and revaluation of gold occurred. THEN the gold stock bull appeared."

I'M NOT SO SURE… moreover, I don't think so!

I 'm not so sure that gold stocks will go down during the next general bear market for stocks. I am referring to statement that gold stocks will follow the general market down the drain. On the contrary, I believe that gold stocks will INDEED provide one of the only safe harbors for all the money abandoning general stocks, once the bear market reasserts itself. I feel this way because HISTORY tells me this… especially in light of current market conditions related to gold stocks vis-a-vis general markets in the entire world.

We are not just referring to a Wall Street Bubble, but A WORLD BUBBLE. With the notable exceptions of current Asian turmoil, nearly all Western stock markets are at All-Time highs…. not only discounting next year's earnings, but those of the HEREAFTER. Now let's look at the record together. Let's examine what really occurred during 1929 (and aftermath), 1973-74 and 1987 general market declines. Let's examine the facts and numbers.

1929 AND AFTERMATH

What Happened to Gold Stocks in the Great Crash Era (1929 - 1935)?

Financial assets as reflected by the Dow Jones Industrial Average (DJIA) reached its peak value of 385 in September 1929, marking the beginning of our country's worst bear market. And although the DJIA finally bottomed at 41 in June 1932, the vast majority of stock investors continued to suffer the effects of the languishing bear market during the next three years. By December 1935 the stock market (DJIA) had only recovered to 140 from its 1932 bottom -- still down a whopping 64% from its September 1929 peak.

What Did Smart Money Do In the 1929 Crash and Aftermath?

During the same bear market period, smart-money moved from the plunging equity markets (i.e. financial assets) to hard asset investments, like Homestake Mining - which is considered a surrogate for all gold stocks.

The stock price of this gold mining company soared relentlessly upward during the entire bear market. Homestake Mining stock rose continuously from $80 in October 1929 to $495 per share in December 1935 - which represents a total return of 519% (excluding cash dividends) during the devastating bear market period.

A much more detailed account of gold mining shares stellar performance in comparison to the devastating general bear market may be seen in the study:"GOLD STOCKS AND THE GREAT CRASH OF 1929 - REVISITED" at website:
http://www.gold-eagle.com/editorials/great_crash.html

"That which has been is that which will be,

And that which has been done is that which will be done."

Solomon

1973-1974 BEAR MARKET DEBACLE

What Happened During the Next Great Market Crash (1973/1974)?

From the market high in 1973 to its low in 1974 the DJIA and the S&P 500 lost almost half their value - while the previously high-flying technology stocks plummeted more than 60%. Enough to cause heart-failure to the credulous believers of THIS TIME IT'S DIFFERENT. Even the relatively "safe" utilities were decimated - as they dropped more than 50% from their 1973 high to their nadir in 1974. H-O-W-E-V-E-R, students of financial history took profitable refuge in gold metal stocks. The Gold Mining Index, composed of ASA, Campbell Red Lake and Dome Mining, appreciated more than 260% from its 1973 low (40) to its 1974 high (147). This merits being redundant. During the severe 1973/74 bear market, stocks lost half their value - while gold mining companies almost quadrupled.

The over-riding guideline of my precious metals' research was aptly described by one of Wall Street's legendary wizards, Bernard Baruch - unfortunately, unknown to most of today's investment Pollyannas. His observation still rings with logic and clarity:

"Gold has worked down from Alexander's time.....
When something holds good for two thousand years,
I do not believe it can be so because of
prejudice or mistaken theory."

1987 MARKET CRASH

Here we have a "horse" of a slightly different color. The following is a post I made to an Internet Chat Group about two years ago --- verbatim.

THE XAU PRICE ACTION DURING THE 1987 CRASH WILL NOT BE REPEATED!

For a number of weeks I have seen several postings alluding to the possibility that in the next stock market decline (or even crash), the XAU may possibly fall in sympathy with the overall market. I am strongly in disagreement with this view for the following reasons.

When the general stock market started to come apart at the seams in October 1987, the XAU HAD ALREADY COMPLETED AN INCREDIBLE LONG BULL MARKET. From its trough of 58.72 in July 1986 to its high of 157 in mid-September 1987,the XAU had appreciated over 167% - IN A LITTLE OVER 15 MONTHS. That's way overbought in anybody's book! So despite the stock market debacle, the XAU was long overdue for its own correction. I cannot think of any historical occurrence where an index rose on average 11% per month for 15 months WITHOUT A CORRECTION. Furthermore, when the silver and gold index is up more than 100%, you may rest assured the gold secondaries were up in the stratosphere of 300-500% appreciation. And as a wise old pundit once warned: "To refuse to cash in on securities that have doubled or tripled, is to reject the inescapable lessons of history."

All the above begs the question: What about today? Is the XAU and secondary gold shares at high risk in the event the general stock market starts to decline in earnest.

In January 1996 the XAU made its high for that cycle, topping out about 150. Since then it has been in a downtrend, falling until January of this year - when it bottomed out at approximately 63. During the last couple of months the XAU has regained ONLY 23% of its slide of the last two years. Consequently, today's XAU situation is totally different than that of late 1987, when precious metals stocks followed the general market down the drain.

Gold stocks as represented by the XAU are STILL SEVERELY UNDER-VALUED. In fact comparison with the general market clearly demonstrates the ONLY REAL VALUE IN WALL STREET TODAY IS THAT FOUND IN PRECIOUS METALS STOCKS.

It is rather obvious the XAU situation today is no where close to the excessively overbought period of late 1987. Besides, the Fed will not allow a 1987-type meltdown to occur. The Fed was caught unawares in that October - although it recuperated rapidly. You can bet your bottom dollar that there are Fed members who watch like hawks the daily Wall Street operations.

Please recall that not too many months ago Fed Chairman Greenspan specifically stated that the Fed was sufficiently armed with the power to dramatically inflate the money supply in order to avert a similar unpleasant occurrence in the future. An October 1987 meltdown will be avoided by excessive increases in M3… far and above the 10% to12% annual growth rate the inflationary action will build a bonfire underneath gold prices… exploding same to the heavens. Obviously, this will give significant impetus to the precious metals bull market - which has already begun.

In summation, the recent past and current XAU situation are the flip-side of its overbought condition in late 1987. Additionally, the gold market sentiment readings are conducive to a strong bull market in all gold shares - á la early 1993! Moreover, there are many technical and inter-market factors which forecast much higher gold share prices for the next six months. …The cards are all falling into place for gold investments to surge.

To wait for gold shares to react - before initiating or increasing your position - will prove to be very foolhardy… and in the long run indeed costly.

Today's bullion and gold share markets remind me of the first 3-4 minutes of Rossini's William Tell Overture - the few moments of calm, before the tumultuous storm.

Founder of Gold-Eagle in January 1997.  Vronsky has over 42 years’ experience in the international investment world, having cut his financial teeth in Wall Street as a financial analyst with White Weld. Vronsky speaks three languages with indifference: English, Spanish and Brazilian Portuguese.  His education includes a degree in Petroleum Engineering from the University of Oklahoma, a Liberal Arts degree from Hartnell College and a MBA in International Business Administration from UCLA – qualifying as Phi Beta Kappa and Tau Beta Pi for high scholastic achievements.  Vronsky believes gold and silver will be recognized as legal tender in all 50 US states and many countries worldwide.  You may reach I. M Vronsky at: vronsky@gold-eagle.com and/or vronsky@bellsouth.net

India is perennially the world’s largest gold consumer.

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