There is a potential for an extended decline in the stock market from these levels should certain price levels be violated and gold is starting to look like an interesting investment option.
I thought it might be interesting to look at the performance of gold and gold stocks during times of extended stock market declines.
Gold Stocks and the Great Crash Era 1929 – 1935?
The Dow Jones Industrial Average reached its peak at 385 in October of 1929 and although the DJIA finally bottomed at 41 in June 1932, the vast majority of stock investors continued to suffer the effects of the bear market during the next three years. By December 1935 the DJIA had only recovered to 140 from its 1932 bottom, but still remained well below the highs of 1929. Interest rate sensitive issues were hit extremely hard with the Dow Jones Utility Average moving from its peak at 145 to only 15 in March 1932 and again in March 1935.
During that same bear market period smart-money moved from the plunging equity markets to hard asset investments. I will be using Homestake Mining as a choice for a gold stock to review. The stock price of this gold mining company soared upward during the entire bear market. Homestake Mining stock rose from $80 in October 1929 to $495 per share in December 1935 a total return of 519% (excluding cash dividends) during a devastating bear market period.
Gold was a very good choice since it took 25 years for a 1929 investment to break even!
What about the market crash of 1973 – 1974?
The Dow Jones Industrial Average collapsed from 1067 on January 11, 1973 to 570 on December 9, 1974.
Once again those who took refuge in gold stocks prospered. 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).
How about the crash in 2000?
On January 14, 2000 the Dow Jones Industrial Average peaked at 11,722 and did not find bottom until October 9, 2002 at 7286.
American Barrick traded at roughly $15 in January of 2000 and by October of 2002 it was trading at roughly $14 not too bad considering the damage wrought on the traditional stock market.
The final Market Crash to look at would be the crash that began in 2007.
The Dow Jones Industrial Average had peaked at 14,164 on October 9, 2007 and didn’t hit bottom until March 5, 2009.
Spot gold prices were at about $735 an ounce and by March 2009 the price was about $925 in March of 2009.
It appears that in the earlier stock market corrections that the returns in gold mining stocks were tremendous. The most recent declines of 2000 and 2007 did not produce huge gains but owning gold or gold stocks was a very good alternative to owning traditional stocks.
Gold stocks appear to be putting in a bottom at the same time that the stock market appears to be making a top.
A point and figure chart count at the $28 price point shows 8 (boxes) x 3 (3 point reversal chart) x 1 (the value of the box) = 24
That’s an initial price objective of $52 or close to 100%.
You can look for protection by putting in a sell stop.