How Would Gold Perform In a Second Stock Market Crash?

1929… the 1970s… 2000… 2008… and now 2020?

In the biggest stock bear markets over the past nine decades, there was an initial crash… followed by a big bounce… and then a more severe selloff, a “second leg down” if you will.

Could it happen again?

As Mark Twain said, “history doesn’t repeat itself but it often rhymes.”

And some of the world’s most successful hedge fund managers are convinced a second drop is coming…

• Billionaire David Tepper, considered one of the world’s most successful hedge fund managers, said last month that “stocks are the most overvalued I’ve seen in my career.”
• Stanley Druckenmiller, whose net worth is $4.7 billion, says “the risk-reward for equities is maybe as bad as I’ve seen it in my career.”
• So-called bond king Jeffrey Gundlach says, “I’m certainly in the camp that we are not out of the woods… I think a retest of the low is very plausible.” He said at the same time that he initiated a short position against the stock market.
• Billionaire Mark Cuban says “the stock market is overvalued… it’s almost impossible to predict where consumer and corporate demand is going to come from. And because of that, it’s hard to create a valuation for businesses.”

With trillions of stimulus flooding the market, I don’t know if we’re looking over the cliff at another crash in the stock market or not. Even Mike Maloney mentioned that stocks could just as easily melt up as they could melt down.

But if we do get another leg down, I wanted to know… what happens to gold in the “crash after the crash”?

Gold in Second-Leg Crashes

I examined the four biggest bear markets in US stocks, ones that included a bounce and then a “second” leg down, and measured gold’s performance during each of those second selloffs. I had an idea of what I might find, but even I was surprised at the results. If you own gold I think you will be, too…

 

1929 – 1933

The stock market crash of 1929 kicked off the Great Depression. After that initial selloff, stocks bounced over 20%, but then proceeded to fall an incredible 84.5% over the next two years.

As most of you know the gold price was fixed during this time, and President Roosevelt nationalized it in 1933 anyway. But investors could own gold stocks as a proxy. Gold equities saw huge buy volumes during the Great Depression.

Here’s how the largest gold producer in the US at the time, Homestake Mining, performed during the Dow’s second leg down.

Homestake Mining—what some investors bought since they couldn’t own gold—ROSE 87.5% during this period. You can see it went on to rise much further, but from the beginning of the Dow’s second leg down to its eventual bottom, this proxy for gold ownership soared.
 

1973 – 1975

The mid-1970s was an ugly period for stock investors. The S&P 500 fell 20% in the first seven months of 1973. It then bounced 10%, but reversed into a second decline that lasted a year and resulted in a 44.1% drop.

Here’s how gold did during that second leg down.

Gold ROSE 52.7% in that second leg down. It eventually eased off when stocks started to climb again, but during the dark days of the second crash, it once again soared.
 

2000 – 2002

In early 2000 the S&P 500 was toppy and choppy. It fell as much as 10% but then gained that and more back. But that second leg down got ugly, as the S&P fell 48.9% over the next two years.

Here’s how gold did during that second leg down.

The gold price ROSE 15.3%, while the S&P fell by almost half.

Keep in mind this was during the “tech wreck” when the Nasdaq fell 66%.

You could talk me into starting the “second” leg down later, and if so the S&P’s loss would’ve been lower, but the gain in gold would’ve been higher.

Either way, the message is the same: gold once again rose during the second leg down for the broad stock market.

2007 – 2009

We all remember the Great Financial Crisis that started in 2008. Stocks starting falling in late 2007, the S&P dropping 16% in five months. It bounced about 10%, then began a second leg down and fell 52.5% over the next 10 months.

Here’s how gold performed during that second ugly downdraft.

The gold price ROSE 5%. That’s not as much as the prior ones, but it logged a gain during the period when stocks lost over half their value.

So, what do we conclude from this?

Gold Has Risen in Major Second Down Legs

In the stock market’s four worst bear markets, ones that included a major second leg down, the gold price has risen every time. It may suffer in the initial crash that kick-starts a bear market, but in these worst cases the demand for gold—and the price—surged when stocks started a second leg down.

Is that what gold will do if stocks crash again today? History is on our side, but whatever is ahead it’s reassuring to know that gold doesn’t follow stocks, and instead does what it’s done for centuries: serve as a hedge, as a store of wealth, and as the strongest form of money mankind has ever had.

 

Jeff Clark, Senior Analyst, GoldSilver.com

David

Nations globally begin to re-open businesses and return to the new normal

It seems highly probable that North America, as well as globally that new cases of the virus will begin to diminish day by day, week by week. Globally the data suggests that the world has hit the peak of new cases of Covid – 19. To date there has been 5.17 million confirmed cases of individuals contracting the virus, deaths reported 1.99 million individuals that have recovered, and 336,000 souls that have died.

The sad truth is that this pandemic will most likely fester for the next couple of years, there is still much uncertainty as to whether or not we see increases as the world begins to reopen businesses, and restart their economies.

This could last until a coronavirus vaccine is developed. Currently the top infectious disease experts in the United States, including Dr Anthony Fauci, believe it is conceivable that a vaccine might be available as early as December.

That being said, it will be the economic fallout from the massive expenditures that will be the dominate component or thread that will define the economic fabric for decades.

The massive expenditures are being made on two fronts, first by the Federal Reserve’s quantitative easing endeavors, and secondly by the U.S. Treasury Department’s responsibility to fund the rescue package which was voted into law on March 27.

 

According to Reuters on May 12 the United States reported a record $738 billion budget deficit in April. The rescue package voted into law will required $2.3 trillion to implement. However, it quickly became apparent that more aid was needed and the estimate of the relief and rescue packages will total approximately $3 trillion.

According to an economic report published in MarketWatch, yesterday the Federal Reserve’s balance sheet has now swelled to the highest level in history, now at $7.09 trillion for the week ending on May 20.

Collectively these massive debts will have to be paid back at some point, and no matter how slowly or quickly they begin to paydown this debt, this process could last far beyond the pandemic and a global return to whatever the new normal will be.

One result that is highly probable from the economic damage caused by these expenditures is the devaluation of the dollar which would cause gold prices to spike dramatically over the next 5 to 10 years.

What – We are still in a Trade War with China?

On top of the current health crisis in pandemic, today news began to surface about heightened tensions between the United States and China. It seems as though market participants and traders are now refocusing on the trade war, resulting in an extremely bullish sentiment for the safe haven asset class, specifically gold.

Collectively the massive increase in expenditures the United States to aid in recovery, and the renewed tensions between the United States and China could ignite gold pricing over the next couple of years. Our technical studies indicate that we could see gold rise as high as $2000 by the end of this year, or by the second quarter of 2021.

 

By Gary Wagner

Contributing to kitco.com

David

Gold, silver pull back on some profit-taking, normal consolidation

Gold and silver prices are lower in midday U.S. dealings Thursday, on routine downside corrections following recent gains. Some profit-taking from the shorter-term futures traders was also featured today. A rebound in the U.S. dollar index today was also a negative daily element for the metals. Once again, it appears the two metals are tracking the U.S. stock indexes, which are lower at midday. June gold futures were last down $27.00 an ounce at $1,725.00. July Comex silver prices were last down $0.556 at $17.47 an ounce.

Attitudes overall are still generally upbeat late this week as governments continue to reopen businesses that had been shuttered for weeks. Some sporting events have been scheduled to resume in the coming weeks and there are rising hopes autumn sports can be played.

Also supporting more positive trader and investor sentiment is the surprising rally in crude oil prices that sees Nymex crude oil trading above $34.00 a barrel Thursday morning. The strong rally in the oil market has caught most oil market watchers by surprise, given significantly reduced demand and still-burdensome global supplies. Just a few weeks ago Nymex May crude oil futures traded as low as -$40 a barrel just before the contract expired.

Global economic data for May is starting to improve from the dire numbers seen in April. The IHS Markit composite purchasing managers index (PMI) for May in the Euro zone rose to 30.5 in May from 13.6 in April. A reading below 50.0 suggests contraction. The U.K.’s PMI for the same period came in at 28.9 from 13.8. Japan’s PMI for the same period was 27.4 versus 25.8. Australia’s composite May PMI was 36.4 versus 21.7 in April.

China has begun its most important political event of the year, the National People’s Congress, after a delay because of the Covid-19 pandemic. The meetings signal what the government is calling its victory over the outbreak that began late last year, and will outline key economic and social goals for the year. U.S.-China relations have soured the past several weeks, amid the pandemic that the U.S. is blaming on China. President Trump tweeted late Wednesday that China’s “disinformation and propaganda attack on the United States and Europe is a disgrace.” The U.S. Senate on Wednesday moved to ban Chinese companies from trading on U.S. stock exchanges.

The other important outside markets see the yield on the benchmark U.S. Treasury 10-year note is currently around 0.67%.

Technically, June gold futures saw no chart damage occur today. The bulls still have the solid overall near-term technical advantage. Gold bulls' next upside near-term price objective is to produce a close above solid technical resistance at the April high of $1,788.80. Bears' next near-term downside price objective is pushing prices below solid technical support at $1,666.20. First resistance is seen at $1,735.00 and then at today’s high of $1,751.70. First support is seen at today’s low of $1,715.30 and then at $1,700.00. Wyckoff's Market Rating: 7.5

July silver futures saw a corrective and profit-taking pullback after hitting a nearly three-month high Wednesday. The silver bulls still have the firm overall near-term technical advantage. Silver bulls’ next upside price objective is closing prices above solid technical resistance at the February high of $19.07 an ounce. The next downside price breakout objective for the bears is closing prices below solid support at $16.50. First resistance is seen at $18.00 and then at this week’s high of $18.165. Next support is seen at today’s low of $17.26 and then at $17.00. Wyckoff's Market Rating: 7.0.

July N.Y. copper closed down 295 points at 243.05 cents today. Prices closed nearer the session low today and on profit taking after hitting a two-month high early on today. The copper bulls have the overall near-term technical advantage. Prices are in a two-month-old uptrend on the daily bar chart. Copper bulls' next upside price objective is pushing and closing prices above solid technical resistance at 255.00 cents. The next downside price objective for the bears is closing prices below solid technical support at 230.00 cents. First resistance is seen at today’s high of 246.80 cents and then at 250.00 cents. First support is seen at 240.00 cents and then at 237.50 cents. Wyckoff's Market Rating: 6.5.

 

By Jim Wyckoff
For Kitco News

 

David

Fed minutes reaffirms Powell's testimony which supports higher gold price

The hard truth remains, economic stimulus continues to be needed as both the Federal Reserve through their monetary policy, and the U.S. Treasury through fiscal policies has ballooned, and more stimulus will likely will be needed.

Today the minutes from the April FOMC meeting were released. They indicated that Federal Reserve members discussed being more transparent in regards to their future direction of interest rates. The Fed minutes coupled with yesterday’s testimony by Chairman Powell and Secretary of the Treasury Stephen Mnuchin continue to be highly supportive of gold prices.

The testimony along with the report by the Congressional Oversight Commission underscored the vast amount of monetary expenditures in response to the pandemic that has rocked the world on two fronts.

First is the effect on millions of individuals who have contracted the disease. According to BBC News the total number of cases of the Covid-19 virus currently stands at 4,891,785, and the death toll is currently at 324,496. The United States has reported that the total number of infected individuals now stands at 1,529,123, of which 91,992 souls lost their lives in the United States due to the pandemic.

The second effect is the economic repercussions because of the pandemic. At the onset of the pandemic it was reported more than 90% of the United States population was under mandatory lockdown. However, across the country, on a state-by-state basis, many states are now relaxing their stay-at-home orders, and our allowing certain businesses on a limited basis to begin to reopen.

Whether or not the move to relax the stay-at-home order or the reopening of businesses will ignite a second wave of new cases in the pandemic is unknown. However regardless of when this pandemic concludes, the economic repercussions have caused the world to face the worst recession since the Great Depression of the 1930s.

According to the International Monetary Fund the global economy will contract by at least 3% this year. According to the IMF’s chief economist, Gita Gopinath, “the crisis could knock $9 trillion (£7.2 trillion) off global GDP over the next two years.”

In other words, even after the pandemic has run its course the economic implications will continue to affect economies globally for years to come.

Gold has now gained value for six of the last seven trading days. With the exception of Monday’s strong decline, gold prices have shown gains since May 11th, when gold was trading at approximately $1700 per ounce. As of 4:05 PM EST gold futures basis the most active June contract is currently trading up $5.50, and fixed at $1751.10. That is approximately a $50 gain since May 11th.

 

By Gary Wagner
Contributing to kitco.com

David

Every time this happens, gold stocks explode – Frank Holmes

Major bull rallies in gold stocks have been preceded by generalist investors rushing back into the sector, and this is exactly what is happening right now, said Frank Holmes, CEO of U.S. Global Investors.

April saw historical highs in gold-backed ETF inflows, as well, record number of new online trading accounts have been opened during the last two months.

“This past quarter has been a game changer. We now have gold rally for three years, and we have many big gold producers promoting and telling the story, like Newmont and Barrick, that they have free cash flow,” Holmes told Kitco News.

Gold stocks have outperformed the broad equities index, with the VanEck Vectors Gold Miners ETF (GDX) up 23% year-to-date, while the S&P 500 has lagged with a -10% loss over the same period.

Holmes attributes this performance disparity on gold miners’ superior cash flows.

“We’re going to see falling cash flow, and no free cash flow [for the broad stock market]. Gold equities, on the other hand, look beautiful,” he said.

Holmes added that he likes royalty streaming gold companies.

“This past quarter, Franco Nevada, Wheaton Precious Metals, and Royal Gold, [posted] $300 million in the quarter for free cash flow. That’s really significant, because the S&P, in free cash flow, collapsed,” he said.

 

By David Lin

For Kitco News

David

Supply crunch pushing silver price to 3-month high

All eyes are on silver as prices are starting the week with some robust follow-through buying after Friday's breakout session.

In a comment to Kitco News, Phillip Streible, chief market strategist at Blue Line Futures, said that a perfect storm of increased investment demand and falling supply is expected to continue to push silver prices higher.

May silver prices last traded at $17.51 an ounce, up 2.5% on the day. Sunday's rally follows silver's 5.5% jump on Friday; silver futures are trading at their highest level since late February. The precious metal has now recovered all of its loss from the March selloff.

Streible noted that the silver's Friday rally picked up new momentum after the release of the Federal Reserve's industrial production data for April. The report showed that industrial production dropped 11.2% last month, the most significant drop in the report's century-old history.

One of the report's components showed that mining output, including gold and silver production, dropped 11.2%, the sharpest monthly decline in history.

"Nobody really talks about the mining numbers in this report, but someone was obviously watching it," said Streible. "The data points to tightening physical supply. Silver prices are going higher because the market is getting a lift from all different angles."

With silver prices back over $17 an ounce ounces, Ole Hansen, head of commodity strategy at Saxo Bank, said that the next critical resistance level to watch is $17.50 an ounce.

He added that silver has room to rally as speculative interest in the precious metal has been declining since early March as investors shed their bullish silver bets as the COVID-19 pandemic was impacting the global economy.

"We have to contemplate the risk of a second wave of the virus wave in the second-half of the year, together with a developing Trump versus China blame game," said Hansen. "With these developments in mind, we see the risk of renewed stock market weakness, a stronger dollar and Japanese yen on safe-haven demand… precious metals look set to rally further on safe-haven and diversification demand."

Although speculative investors have been reluctant to hold silver, Hansen said that investor demand in silver-backed exchange-traded products remains robust.

"Apart from a small dip in March, ETF investors have been continued buyers of silver ETFs since January. Total holdings have reached a record 98 million ounces," he said.

 

By Neils Christensen

For Kitco News

David

$9,000 gold and triple-digit silver prices will come, but do this first – Midas Touch Consulting

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Long-term, investors can expect gold prices to climb multiple times its current value, and silver prices to rally into the triple digits, but they should not count on the precious metals to break out in the short-term.

In , a correction is due and investors should take this as a buying opportunity, said Florian Grummes, managing director of Midas Touch Consulting

“It looks like [gold will get] a consolidation on the higher levels, with one nasty, little pullback where all the weak hands are shaken off and then the next wave up towards $1,800 and then the all-time highs of $1,920,” Grummes told Kitco News. “Once gold sustainability takes out the all-time high of $1,920, it can run easily a few hundred dollars further.”

In the next five to ten years, gold prices could climb to $8,000 to $9,000, with silver following suit in this bull-run, due to the similar macroeconomic environment that we currently share with that of the 1970’s, when gold prices climbed several hundred percentage points, Grummes noted.

“If you look at it from a very long-term perspective, and you can only compare it to the bull market of the 1970’s. Once the bull market started again in 1976, it went up for four years and it went up basically from $100 to $890, so nearly nine-fold. If you use the same ratio to today’s numbers, we would end up having gold, at some point in the future, $8,000, $9,000 gold, but we’re talking five to 10 years, I think,” he said.

What makes our situation similar to the economic landscape of the 1970’s is the potential for stagflation to set in, Grummes noted.

Silver’s outlook is equally positive on a long-term basis, and investors should not worry too much about the entry point if their time horizon is sufficiently long.

“Silver has huge upside potential. It’s extremely undervalued in comparison to gold. It’s a very cheap inflation hedge. I think at some point over the next few years silver will run up against the $50 level again,” he said. “There will be another breakthrough over the next two to five years and once that happens, I think silver is off to three-digit numbers.”

On bitcoin, Grummes said that the largest cryptocurrency is like the digital version of gold in its hedge properties, and should be owned in the same portfolio as the yellow metal.

 

By Kitco News

David