Mark Twain said history
doesn't repeat itself but it rhymes. We often see that in the capital
markets. The big decline in Gold this year is reminiscent of that of
1975-1976. Yet, aside from that there are several other similarities between
today and 1976. Gold, gold stocks, the stock market and commodities appear to
be in a similar position today compared to 1976. We note and discuss the four
similarities.
1. Decline in Gold Stocks
From 1974 to 1976 the
Barron's Gold Mining Index declined 67%. From 2011 to 2013, the HUI Gold Bugs
Index declined 66%. The chart below is an updated chart of all of the worst
cyclical bear markets in gold stocks, dating back to 1938.
The next shows three of
the four major cyclical bear markets which occurred within secular bull
markets. (The 2008 bear is omitted). Look at how close the current bear is to
the 1974-1976 bear? They are nearly identical in terms of price and time. It's also not far off from the other bear.
2. Gold Stocks vs. S&P 500
While gold stocks
experienced a 67% decline from 1974 to 1976, the stock market recovered
strongly from the 1973-1974 recession. The chart below (rebalanced) shows the
Barron's Gold Mining Index against the S&P 500. The ratio declined 76% from 1974 to 1976.
Just like from 1974 to
1976, the gold stocks from 2011-2013, when measured against the S&P 500,
have declined 77%.
3. Decline in Gold Price.
From 1974 to 1976 Gold
declined 47%. From its 2011 top to 2013 bottom, Gold declined 37%. Why was
the decline in the 1970s more severe? Gold was only free trading for less
than five years. In that period the price exploded about 457% whereas in the
present bull market Gold had risen 650% in 11 years. In the three years prior
to 1974 top Gold gained 333% which dwarfs the 130% gain in the three years
before the 2011 top. These figures explain why Gold in the present bull
market hasn't had a deeper downturn
4. Relative Strength in Commodities
Typically Gold leads an
inflationary cycle. Gold leads Silver which leads the commodity complex.
However, in the mid to late 1970s, the CRB index (today's CCI) bottomed
before Gold. The CRB bottomed at the start of 1975 while Gold bottomed in
summer 1976. After Gold bottomed, it regained relative strength.
Interestingly, Silver also bottomed in 1974 and basically held steady for a
few years while Gold declined.
Today, the CCI (old CRB)
closed at 519. At the 2012 low it closed at 504. Gold closed at $1541 then
and closed today at $1320. The CCI has strongly outperformed Gold over the
last 17 months just as it did in 1975 and 1976. In the second half of the
1970s, commodities, following the recovery from the nasty 1973-1974 recession
led the new inflationary cycle (rather than precious metals). Could we be
seeing the same thing today? There are early indications. Oil has been strong
for a while. Wheat and Sugar have broken out of their downtrends. Silver has
outperformed Gold over the last few months.
To conclude, it makes
total sense that the current decline in gold stocks is most similar to the
1976 decline. The current bear market followed 11 years of a bull market
while the 1974-1976 correction followed 14 years of a bull market. None of
the other bear markets are similar to todays. The two worst declines were in
1980-1982 (72%) and 1996-1998 (67% in BGMI and 72% in GDM). The 1980 decline
followed a 20-year bull market and a parabolic top in the metals. The
1996-1998 bear followed a three year cyclical bull that ended in a mania.
Meanwhile, we've noted the similarities beyond the precious metals sector.
The stock market has had a great run and dramatically outperformed precious
metals. The economy is several years past a severe recession. Commodities as
a whole have held up better than precious metals.
However, this counter
trend move of the past two years is nearing its peak and its setting up a
great opportunity in gold and silver stocks and a fantastic opportunity in
select companies. As this bottoming process in precious metals moves to its
final stages, readers are advised to identify the companies with the best
fundamentals and growth potential that are showing relative strength. Focus
on the leaders and avoid the laggards.
Good Luck!
If you'd be interested in our analysis on the companies poised to lead
this new bull market, we invite you to learn more about our service.
