Gold Stocks Performance Following Market Crashes

Over the past 100 years, there have been seven bear markets or crashes of 35% or higher. After or during every decline but one, the gold stocks enjoyed outstanding performance.

It is essential to understand the underlying fundamental catalyst.

A crash and recession leads to aggressive rate cuts and falling real interest rates, which in turn can spark an economic recovery that often leads to rising inflation or inflation expectations. Hence, some of the best moves in history have followed market crashes. 

Let’s run through history and see if there are similarities to today.

Back in 1929, the SP Gold Index, which advanced roughly 8-fold from the end of 1929 through 1937, contained two or three gold mining companies. Those were Homestake Mines, Dome Mines, and Lake Shore Mines.

The index enjoyed a particularly strong gain during the first half of the 1930s. From April 1930 through February 1936, the index gained 6.9 times. 

Back then, Gold was legally cash. It immediately benefited from the crash as input costs plummeted and later when FDR devalued the US dollar by raising the Gold price. 

SPGold 1890-2015

The only time gold mining stocks did not benefit from a severe bear market was during, in my opinion, the worst bear market ever. From 1937 to 1942, the S&P 500 declined 60% over a more than five-year-long bear market. 

The bear market was so bad that there were only three counter-trend rallies that lasted five to six months. In fact, it shares some similarities to the gold stock bear market from 2011 through 2015.

Moving along, let’s look at the two bear markets within a turbulent six-year period.

The S&P 500 declined 37% from the very end of 1968 until early 1970. Both monetary and fiscal tightening, to ward off inflation, caused the downturn. 

The Barron’s Gold Mining Index (BGMI) bottomed five months before the S&P 500 and would double over the next 15 months. 

The real big move began shortly after that, following the end of the Gold Standard. The BGMI would surge 500% over the next two and a half years, and the majority of the gain occurred over the back half of that period while the S&P 500 was cut in half.

The end of the Gold Standard, rising inflation, and the Oil embargo of late 1973 contributed to the bull market in precious metals and economic recession.

S&P 500, Barrons Gold Mining, Gold 1964-1977

The stock market crash of 1987 did not make the cut as it was not as deep as the others, nor did it produce an immediate recession.

The last two crashes and recessions occurred in the 2000s, and both produced spectacular moves in precious metals. 

The bull run of the early 2000s was much like the one in the early 1930s. The magnitude and length were similar, and both moves began well before the stock market bottomed. 

S&P 500, HUI, Gold 2000-2011

The 2008 to 2011 cyclical bull market was led by Silver and the juniors. GDXJ’s parent index gained nearly 7-fold while the HUI gained over 4-fold.

I have maintained a collection of data on junior gold and silver companies dating back to 2000. 

A basket of some of the leading juniors gained roughly 14-fold in the two and a half years following the lows in Q1 2001 and Q4 2008. 

Before the Covid19 pandemic, the best historical analog for the gold stocks was the early 1960s. The crash has introduced viable comparisons to the bears that began in 1929, 1968, 2000, and 2007.

Based on valuation, the early 2000s is the best comparison.

The bears that began in late 1929 and late 1968 brought about currency devaluation against Gold. Something similar could happen over the years ahead.

The aggressive monetary and fiscal policy is similar to that of 2008 but may end up being most similar to that of the early 1930s. 

The recent recovery in the largest gold producers is most similar to late 1929. 

The crash was near the start of the bear market. That is most similar to 2000 and 1929.

In the years before 1968-1970 and 2007-2008 bears, gold stocks enjoyed at least a six-year bull run. That is different from today.  

One important takeaway is that the precious metals sector looks to be in position for a lengthy bull run and something similar to what occurred in the 1930s, 2000s, and 1960s. 

I’m trying to find the companies that will outperform the GDXJ and perform like those in the analog chart.

The crash has delivered short-term pain and anxiety, and even if precious metals have already begun the next leg higher, plenty of incredible values remain that could turn into 5 and 10 baggers. To learn more about the stocks we own and intend to buy that have this potential, consider learning more about our premium service.