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June 5, 2009
Editor's Note--
Traditional wisdom has it that Gold performs well in
times of financial distress. Also Gold is
considered an inflation hedge... but what if Deflation
wins? In this insightful article Jeff Clark
answers exactly that question.
Tim
McMahon, editor
Gold Stocks
in a Depression
By Jeff Clark, Editor,
BIG GOLD
What if deflation
wins?
While we think the odds are strongly stacked against it,
particularly given the government’s furious pace of money printing,
the prudent investor understands – and respects – the time-tested
adage, “Nothing is guaranteed.” So while our chips sit squarely on
the spot marked “inflation,” what will happen to gold stocks if
we’re wrong?
The Great Depression Speaks
The most notable
example of what happens to gold stocks in a prolonged deflationary
environment is the Great Depression. However, the United States was
on a gold standard at the time, so miners had a guaranteed selling
price – which was a good thing for them, because their operating
costs were plummeting. So the comparability isn’t perfect, but let’s
see what we can learn.
When the stock market crashed in 1929, gold stocks were part of the
general wreckage (sound familiar?). The market then rallied and
recovered almost 50% of its losses by April 1930, with gold shares
again tagging along. It’s what happened next that gives us our first
clue about deflation’s effect.
When the bear market resumed in the summer of 1930, all securities
sold off again – except gold stocks. Gold shares stayed basically
flat until early 1931, when they boarded the elevator and headed for
the penthouse.
Let’s look at how shares of Homestake Mining, the largest gold miner
in the U.S. at the time, and Dome Mines, Canada’s senior producer,
performed during the Great Depression.
|
Company |
Stock Price 1929 |
Stock Price 1933 |
Total Gain |
|
Homestake Mining |
$65 |
$373 |
474% |
|
Dome Mines |
$6 |
$39.50 |
558% |
And the chart
doesn’t show that you could have bought both stocks at half their
1929 price five years earlier, which would have led to gains of
around 1,000%. And get this: both companies paid healthy and rising
dividends as the depression wore on; Homestake’s dividend went from
$7 to $15 per share, and Dome’s from $1 to $1.80.
Yes, volatility
was high in the gold stocks throughout the depression, with
occasional wild price swings, but after the 1929 crash most of the
volatility was to the upside.
The bottom line is
that the two largest gold producers – during a time of soup lines
and falling standards of living – handed investors five and six
times their money in four years.
From Homestake’s chart, you get a clear picture of what the stock
did compared to the market as a whole:
You’ll notice the large spike down in both Homestake and the Dow
during the 1929 crash... but then look at Homestake’s recovery
immediately afterward, returning close to its old high. This is
eerily similar to our recent pattern: our stocks sold off violently
last October but have since doubled or more from their bottoms.
You’ll then notice that Homestake took almost two years to exceed
its old high, but once it broke out, it was off to the races. The
stock doubled four times in five years during a seven-year run to
its peak after the ’29 crash.
The conclusion? If history is any guide, gold stocks can hold their
own against deflation. And they could profit tremendously if the
demand for gold as a safe haven continues to grow.
Gold vs. Deflation
On April 5, 1933, President Roosevelt issued an executive order
forcing delivery (confiscation) of gold owned by private citizens to
the government in exchange for compensation at the fixed price of
$20.67/oz. And less than nine months later, he raised the gold price
to $35, effectively diluting the dollar in every wallet 41%
overnight and swindling everyone who had turned in his gold.
We don’t know exactly what an untethered gold price would have done
during the depression, but given its distinction in history as a
store of value, it’s likely to retain its purchasing power in a
deflationary setting regardless of its nominal price. In other
words, while the price of gold might not rise, or could even fall,
your best protection is still gold.
But with this said, the overriding concern is that in a fiat system,
any deflation will be met with an inflationary overreaction (as
we’re seeing). And the worse the deflation, the more extreme the
overreaction will be.
It’s for this reason that the editors of
BIG GOLD urge you to own physical gold, in your
possession and under your control, given its reliability as a store
of value in both inflationary and deflationary environments. If you
have less than our recommended one-third of your investable assets
in some form of gold, check around for places to buy gold coins and
bars at good premiums.
The Silver Lining
For those with an inclination toward silver, our research points to
clear signs that silver is increasingly being viewed as a store of
value and not just as an industrial metal.
Here’s a comparison of silver’s performance vs. base metals over the
past six months (10-1-08 through 3-31-09), which includes last
fall’s meltdown:
Silver +6.7%
Copper -36%
Lead -18%
Aluminum -35%
Nickel -25%
Zinc -13%
GFMS Index* -54%
[*Based on the average equally weighted settlement price for
aluminum, copper, lead, nickel, tin, and zinc.]
If silver were viewed solely as an industrial metal, the price would
be off sharply.
This doesn’t mean we think silver or silver stocks can’t go
temporarily lower from here, but rather that the demand for silver
as a store of value metal will be growing.
Bottom line: Whether we’re served debilitating deflation or
insidious inflation, holding gold (and silver), along with an
appropriate allocation of precious metals stocks, offers us both a
fort for protection and a canon for profit.
Buying physical gold and silver as
safe-harbor assets is for many investors a no-brainer at this point.
But only a few have heard of another prudent gold investment – one
that has gone up more than 50% in 2008, at the exact same time when
the overall stock market bombed. You don’t want to miss out on
owning this “48 Karat Gold” stock…
click here to learn more.
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Epilogue: Until it closed
in 2002 it was the largest and deepest gold mine in
North America, producing more than $1 billion in gold.
Because of its depth it has been used since the 1960's
to perform research on the atomic particles "neutrinos".
In June of 2009, researchers at Berkeley
announced that Homestake would be reopened for
scientific research on solar neutrinos and dark matter
particles.
In 1987 Dome mines merged with
Placer Development Limited of Vancouver and Campbell Red
Lake Mines Limited of Toronto forming one of the world's
largest gold producers.
In 2006,
Barrick Mines (ABX)
acquired Placer Dome Inc.,
Barrick
is currently
traded on the NYSE under the symbol
(ABX)
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How to Forecast Gold and Silver Using the
Wave Principle
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