Many investors hold gold and silver to protect themselves against various economic shocks. But does this coverage hold up during stock market crashes? Knowing what effect a market crash and subsequent dollar collapse will have on silver and gold is vital for making investment decisions from time to time and deciding what course to take in the event of a major recession or depression.
It is a common assumption that gold and silver prices will fall along with the market. and if that’s the case, wouldn’t it be better to wait to buy them until the dust settles? but let’s assume that investors are right and that your precious metals hold their value, or even gain value. during a depression, is it better to have gold or silver? In other words, which one will give you the best chance of weathering the storm?
Before formulating a strategy, let’s first look at price data from previous stock market crashes… and see what it can tell us that could influence investment decisions.
the message of the story
To help answer the questions posed above, I looked at past stock market crashes and measured the performance of gold and silver during each one to see if there are any historical trends. The table below shows the eight biggest declines in the S&P 500 since 1976 and how gold and silver prices responded to each.
[note: green means the stock rose when the s&p collapsed, red means it fell more than the s&p, and yellow denotes dropped but less than or equal to the s&p.]
what happens to gold and silver during stock market crashes
There are some reasonable conclusions we can draw from this historical data.
1. In most cases, the price of gold rose during the biggest stock market declines.
2. investors should not panic over an initial drop in gold prices.
You may recall that gold fell in the initial shock of the 2008 financial crisis. This recent, yet memorable, example is perhaps why many investors think gold will fall when the stock market does. But while the S&P continued to slide, gold rallied, ending the year up 5.5 percent. Over the entire 18-month stock market selloff, gold was up more than 25 percent. The lesson here is that even if gold falls initially during a stock market crash, one should not assume that it is down. in fact, history says it could be a great buying opportunity.
3. Gold’s only significant sell-off (46% in the early 1980s) came just after its biggest bull market in modern history.
Gold rose more than 2,300 percent from its 1970 low to its 1980 high, so it’s not terribly surprising that it fell with the broader stock market at the time. in recent years, the situation has been exactly the opposite. gold suffered a 45 percent drop from its 2011 peak to its 2016 low, which was one of its worst bear markets in modern history. at the same time, this isn’t entirely surprising either, given its rapid gains during the 2008 crash and 2011 crash.
4. silver didn’t fare as well during stock market crashes.
in fact, it rose only in one of the s&p sell-offs and was roughly flat in another. this is likely due to the high industrial use of silver (about 56% of the total supply) and that stock market sell-offs are usually associated with a poor or deteriorating economy. however, you will see that silver fell less than the s&p in all but one crash. this is significant because silver’s high volatility would normally cause it to fall further. Note also that silver’s biggest rise (+15% in the 1970s) came in the midst of the biggest bull market in history. it also finished flat at the end of the financial crisis in early 2009, which was its second largest bull market. In other words, we have historical precedent that silver could do well in a stock market downturn if it is already in a bull market. otherwise, you could run into problems.
The overall message of the story is this:
• There is a good chance that gold will not fall during a stock market crash and, in fact, it is likely to rise. silver may depend on whether it is in a bull market.
So why does gold behave this way?
the yin of gold versus the yang of the stock market
The reason gold tends to be resilient during stock market declines is that the two are negatively correlated. that is, when one goes up, the other tends to go down.
This makes sense when you think about it. Stocks benefit from economic growth and stability, while gold benefits from economic difficulties and crises. if the stock market falls, fear is usually high and investors often seek the safe haven of gold. if stocks are up, the perceived need for gold by major investors is low.
Historical data supports this theory of the negative correlation between gold and equities. This chart shows gold’s correlation with other common asset classes. the zero line means that gold does the opposite of that investment half the time. if the line is below zero, gold moves in the opposite direction of that reversal more often than with it; if it’s above zero, you move with that investment more often than against it.
Stocks are negatively correlated with gold
You can see that, on average, when the stock market crashes (US stocks on the chart), gold has historically risen more than it has fallen. Gold has also historically outperformed the cash sitting in your bank account or money market fund. even real estate values trail gold only a little more than half the time.
This is the practical conclusion for investors:
- if you want an asset that rises when most other assets fall, gold is likely to do so most of the time.
This does not mean that gold will automatically rise with every drop in the stock market. however, in larger crashes, history says gold is more likely to be sought out as a safe haven. So if you think the economy is likely to be strong, you may want to hold less gold than usual. If you think the economy is headed for weakness, you may want more gold than usual. And if you think the economy is headed for a period of turmoil, you may want to own a lot.
There is one more possibility we need to consider…
what if the stock market doesn’t crash?
It’s not always easy to predict whether stocks will fall off a cliff. so what if they don’t? Or what if the market is flat for a long period of time? You might think that’s unlikely, given the amount of risk inherent in our economic, financial, and monetary systems today. But look at the 1970s: It had three recessions, an oil embargo, interest rates that hit 20 percent, and the Soviet invasion of Afghanistan. here’s how the s&p performed, along with gold’s performance.
gold rose 2328% from low to high while s&p 500 remained flat
the s&p basically went nowhere for the entire 1970s. after 10 years, it was up a measly 14.3 percent (excluding dividends). gold, on the other hand, posted an incredible performance. it rose from $35 per ounce in 1970 to its peak of $850 in January 1980, an astonishing 2,328 percent.
In other words, the largest gold bull market in modern history occurred while the stock market was essentially flat. That’s because the catalysts for higher gold weren’t related to the stock market: they were more related to the economic and inflationary issues going on at the time. we have to take into account the possibility that this will happen again and that citizens will be attracted to gold for reasons unrelated to the performance of the s&p.
how long it takes to recover from stock market crashes
Stockbrokers sometimes point to a 100-year chart of the stock market and show that it always eventually recovers and goes up, even after big drops. however, what they don’t show is how long it takes to recover after taking inflation into account.
some stock market crashes have taken a long time to get back to the same; so long, in fact, that if the investor were to spend the proceeds, he would discover that the same amount of cash would not buy as much. . Because the recovery took so long, inflation eroded their purchasing power, despite recovering everything they had lost in the crisis.
Believe it or not, the amount of time it takes to regain purchasing power after the biggest stock market crashes is measured in years.
what we know from history is that the best defense against the prospect of a stock market crash and the corrosive effects of inflation is gold.
the best investor strategy
Anything can happen when markets are hit by extraordinary volatility. But regardless of what stocks may do, is it wise to be without a significant amount of physical gold and silver in light of all the risks we face today? I don’t think so.
Perhaps the ideal solution is to have a cash reserve ready to deploy if we have another big drop in precious metals, but also to have a bullion reserve already set aside in case the next crisis sends gold to the races.
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