Why Gold Will Decline More than the Markets
I was scanning the news headlines on MarketWatch.com and came across this story, titled "Getting it Right and Still Losing." In the article by Mark Hulbert, it is mentioned that experienced investment newsletter writers Harry Schultz, Howard Ruff, and James Dines have lost a significant amount of their investment funds by investing in gold and silver during the market turmoil of the last year. According to Hulbert, the losses sustained by these three market professionals ranged from 64.9% to 70%.
Mark Hulbert's conclusion in this article is that although the newsletter writers had foreseen the coming declines, they didn't know exactly when they would occur and therefore were unable to take advantage of the profit opportunities by maneuvering their money on the opposite side of the market downdraft. Because Mark Hulbert has been reviewing newsletters for quite a while, it would appear that his conclusions about these three market professionals is accurate. Unfortunately, just as the newsletter writers got the gold market wrong, so too does Mr. Hulbert in his assessment of the actual reason why these people to failed come out winners.
Despite their experience, the mistake that Harry Schultz, Howard Ruff, and James Dines made is very simple. They believed that if the stock market was going to collapse, then gold and silver would be the place to invest all of your money. Unfortunately, when the price of stocks fall, so too does the price of gold, and to a greater degree, gold & silver stocks.
The only time that gold and silver prices rise at the same time that the stock market falls is when the government itself is on the brink of bankruptcy. While it may be the assertion of the newsletter authors that the government is on the brink of failure, the process of actually getting to that point requires a significant amount of bailouts.
So, what evidence do we have to show that gold and silver actually does go down more than the general stock market? Below is a table that shows the performance of the Dow vs. the price of gold and the gold stock index (XAU). This table was originally created by David Marantette, former publisher of the Goldstock and Dear Dow Letter. In his research, Marantette wanted to emphasis the importance of this concept so he included the available data from the period during a gold bull market (1975-early 1980) to make his point.
Marantette picked all periods that the Dow Jones Industrial Average fell by 10% or more and compared that performance with the price of gold until 1984 and the Philadelphia Gold Stock Index (XAU Index) from 1986 until March 2001. I gathered the data from May 2001 until October 2007. Take note of the fact that out of thirty Dow declines of 10% or more, the price of gold/gold stock index declined 28 times. Of those 28 declines, gold fell by a greater percentage than the Dow Industrials in 27 instances.
Given what has been demonstrated, the lesson should be clear: gold and gold stocks cannot climb higher at the same time that the Dow Jones Industrial Average is in a declining trend. If the newsletter writers believed that gold was the place to be when the stock market declines then it stands to reason why they lost so much money. Timing wasn't the problem, instead it was the lack of understanding of the relationship between the selloff in the general stock market and a selloff in the price of gold and gold related assets.
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This article has 25 comments:
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terpsucka
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38 Comments
Nov 18 08:24 AM-
Phiota
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7 Comments
Nov 18 08:24 AM-
Alan von Altendorf
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352 Comments
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Nov 18 08:36 AMftalphaville.ft.com/bl.../ on devaluation.
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User 30121
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338 Comments
Nov 18 09:03 AMPersonallyl, I have MADE money in gold and silver. Of course, I wouldn't buy PAPER gold or silver...EVER! That lesson was learned the hard way.
Your analysis is flawed for that reason, too. Physical gold HAS NOT BEEN A DISASTER as you indicate paper PMs have been.
Save this article to republish, say, in Mar 2009, I suspect gold and silver will be well above their current prices.
Also, I don't believe those gents you hammered in your article anticipated the GREEDY ELITIST BASTARDS would STEAL through MANIPULATION severely affecting the true price of PMs.
WISE UP!
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Beabaggage
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72 Comments
Nov 18 09:13 AM-
foxy44
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5 Comments
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Nov 18 10:02 AMthey vritten wrong new.
and also, the world never seen crisis like this one !!!
don't listen them.
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foxy44
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5 Comments
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Nov 18 10:05 AM-
sorgmot
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123 Comments
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Nov 18 11:09 AM"The world has never seen a crisis like this one! "
Asset prices in US$ and other currencies too have fallen in half.
Now everyone owes more than he or she can realize by selling all their assets.
Your governments have stolen your life's work from you and placed you in perpetual debtors prison. Yes, there is really a trol under the bridge who collects the proceeds of your labors.
The sirens of debt called you to fulfill your dreams by borrowing and thus have lured you onto their rocks where they can pick your bones.
Governments defend the sirens to the end. Hunting sirens down and ridding.the world of them is a no no.
After utter destitution rules, the wonders of gold as money are rediscovered..
It does not vanish or explode in quantity as time goes by. It grows in a small amount each each maintaining price stability for other assets as years pass.
Keynes said banish gold and let governments rule everything. Governments grew to infinite size pressing down the living standard of the population and exploding the size of the destitute portion of the citizens. We are winding up the horrible mess left by that religion.
Good luck.
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Dean Plassaras
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50 Comments
Nov 18 11:16 AM-
jayson333
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3 Comments
Nov 18 11:33 AMIn 2000 it was over 40:1 again, today it is down to 11:1. In the long term since 2000 gold has performed 4x better than the DJIA.
I expect the ratio will approach 1:1 again
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foxy44
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5 Comments
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Nov 18 01:05 PMno, look the oil, gold and all commodities, none of those follow the $ now, why?
do you have an idea?
from my side, I think the world like to leave $ as commodities currency
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chux08
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42 Comments
Nov 18 01:12 PMOf course in the chart form it's much more impressive and I would think that through some search engine research one could find this same graph. IRREGARDLESS....it's very COMPELLING and UNARGUABLE. $100,000 invested in gold since 2000 has UNDENIABLY done the best of the other 4 investment choices mentioned earlier, with silver being a close second.
Like they say in poker....READ EM (it) AND WEEP.
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chux08
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42 Comments
Nov 18 01:23 PM-
GMiki
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325 Comments
Nov 18 02:08 PMI was just listening to Jim Puplava talk about possible devaluation of the dollar and other currencies. When FDR devalued, he revalued gold higher.
Yes, this has been a painful environment for the natural resources investor, but then I remind myself of the fundamentals and why I'm in this sector and I only wish I had more cash to pour into the same companies I already own (not to mention 100 ounce silver bars and such).
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DaveW
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224 Comments
Nov 18 02:14 PMBTW, inflation is very low right now, hyper-inflation is coming (hint, hint).
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jimmy46
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254 Comments
Nov 18 02:46 PMI think that's over.
Look to the future.
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Alxsteele
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4 Comments
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Nov 18 04:45 PMAlso, are we talking about paper money?
And like they say in the south (where my brother lives), "All ya'll done said it all before"--do you mean paper or hard currency? I'm sitting on a 5% loss on my bullion verses 40% losses in my 401.
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Crude.Expert
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8 Comments
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Nov 18 04:49 PM1. Gold is ‘real money’, fiat currencies are not. This is because at any point in time gold satisfies all components of the definition of ‘money’ where as a ‘store of value’ that definition in part means that ‘money’ must be able to be reliably retrieved and ‘predictably useful’ when retrieved. Fiat currencies do not meet this test as ‘money’.
2. At any point in time the U.S. $ is a measure of the price of gold, not a measure of its value.
3. At any point in time Gold’s value needs to be thought about in the context of its then current and prospective purchasing power, having regard to prevailing and prospective macro-economic conditions.
4. Whether the future economic circumstance is inflationary or deflationary some gold is a good thing to own as a ‘safe haven holding’.
Check out the article:
www.stockresearchporta.../
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OilyGasMiner
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44 Comments
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Nov 18 07:35 PMAs the above point mentioned
"At any point in time Gold’s value needs to be thought about in the context of its then current and prospective purchasing power, having regard to prevailing and prospective macro-economic conditions."
What is the context though? an ailing economy, country at war, rising debt levels, rising unemployment, lack of liquidity, lack of consumer confidence. THE LIST GOES ON! I do agree that there is a possibility that Gold may fall more than the market, however this will be for a short period of time, with a massive spike occurring in gold for a major correction.
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Jim Lundberg
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4 Comments
Nov 18 09:21 PM-
Dividend Inc
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17 Comments
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Nov 19 10:51 AMThe purpose of this exercise is to offset the expectations for gold if at the same time there are expectations that the Dow is going to decline as well. I believe that the Dow should be headed to the 4000 level at the very least. If my belief on the Dow is correct then I can't ignore the fact that gold and gold stocks also crash when the Dow heads lower.
Again, any significant decline in the Dow will put pressure on gold and gold stocks.
Thanks
Touc
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Dividend Inc
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17 Comments
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Nov 19 11:10 AMYour suggestion that the data that I have used didn't go back far enough. I, like you, would have preferred data points much further back in time. However, as a substitute I looked at commodiy prices, real estate prices and inflation rates for the period of 1929 to 1934. During this specific period gold was on the decline and hit bottom in 1934. I will post on my blog, at a future date, the charts that confirm this data.
The point being, gold can't go up until the deflation ends. Therefore I am cautious about outlook for gold if the Dow keeps falling.
Touc
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De Graaf
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59 Comments
Nov 19 12:39 PMThere could be some bad news ahead for gold.
IMF is short on liquidity and has asked for $100 million within 6 months from now to support nations accross the globe. Problem is that there non-concessional fundings are depleting rapidly, and therefore I think, they eventually will have to liquidate assets, and thats their 104 million of fine ounces of gold reserves...as a final resort.
See goldprices.biz (recent topic comments) for my elaborate explanation on recent developments.
Also, remember that the one and only push to rally in the price of gold, was SPDR Gold trust (GLD). This paper-asset fund (its represents gold, in paper-format!) is the largest holder of gold bullion in the world. This one will have to be watched carefully. They have gold reserves equalling China's amount, and if they start selling, like they did in September/October (I believe it was 80 tons), gold can get as low as $500 an oz.
Together with IMF selling, this could be a true disturbance in the free market principle for gold. Be on the lookout for another round of hedgefund selling and credit card defaults, that could unleash another selling spree in global markets.
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De Graaf
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59 Comments
Nov 19 12:40 PM-
loch
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4 Comments
Nov 19 05:50 PM