Gold Stocks During Great Depression

The investment markets are no strangers to cycles, and the current market frenzy, characterized by irrational exuberance, has once again propelled us into a phase of euphoric mania. This phenomenon has raised concerns among prudent investors, leading many to predict a secular money change from financial assets to real assets in the near future. In this article, we explore the significance of gold stocks during historical economic crises and shed light on how investors can navigate the volatile markets of today.

The Euphoria of the Great Depression Era

The late 60s and early 70s witnessed a go-go investment gunslinger mentality among Wall Street’s youngish money managers. Driven by greed and blinded by euphoria, many investment professionals confidently declared, “This time it’s different!” The stock and bond markets soared to all-time high valuations, with market wisdom seemingly disregarded in the pursuit of quick gains. However, history has shown that youthful exuberance is often the last refuge of the inexperienced, and sooner or later, the bubble bursts, bringing focus back to intrinsic values and traditional refuge investments.

Gold Stocks in the Great Crash Era

The 1929 stock market crash, fueled in part by the abuses of investment trusts, led to one of the worst bear markets in history. Financial assets, reflected by the Dow Jones Industrial Average (DJIA), reached an astronomical peak value of 385 in October 1929, only to plummet during the subsequent bear market. The DJIA bottomed at 41 in June 1932, and by December 1935, it had only recovered to 140, still down a staggering 64% from its 1929 peak. Interest rate-sensitive equities, such as those in the utility sector, also suffered immense losses. The Dow Jones Utility Average (DJUA) hit its peak at 145 in September 1929 and tumbled to a dismal low of 15 in March 1932. By March 1935, it had not improved significantly, reflecting a cardiac arresting 90% decline from its 1929 highs.

In comparison, sharp-witted investors moved from plunging equity markets to hard asset investments like gold mining stocks. Homestake Mining, acting as a surrogate for all gold stocks, witnessed an astonishing rise in its stock price during the bear market. From $80 in October 1929, Homestake Mining soared to $495 per share in December 1935, delivering a total return of 519% (excluding cash dividends) during the devastating bear market period.

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What Did Smart Money Do in the 1929 Crash

While investors who adhered to a buy-and-hold strategy in financial assets experienced substantial losses, those who wisely shifted to hard asset investments thrived. Smart and informed investors invested $10,000 in Homestake Mining in late 1929, which increased in value to nearly $62,000 by December 1935. This extraordinary compound rate of return of 35% per year in appreciation alone exemplifies the monumental difference in investment results during a severe bear market.

In contrast, a $10,000 investment in the DJIA or DJUA during the same period would have resulted in significant capital losses, showcasing the value of gold stocks as islands of economic refuge during the Great Depression.

The Next Great Market Crash

Fast forward to the market upheaval of 1973/1974, where the DJIA and S&P 500 lost almost half their value, and technology stocks plummeted more than 60%. Even the relatively “safe” utilities experienced a devastating 50% drop from their 1973 highs. Amid this turmoil, gold mining companies emerged as profitable refuge investments. The Gold Mining Index, composed of ASA, Campbell Red Lake, and Dome Mining, appreciated over 260% from its 1973 low to its 1974 high.

Conclusion

The cyclic nature of investment markets is undeniable, and as history repeats itself, we witness irrational exuberance gripping the current market mania. In the face of these volatile times, prudent investors may consider a secular money change from financial assets to real assets, including gold stocks. As history has shown, gold has maintained its value throughout the ages, and wise investors have recognized its enduring appeal. Bernard Baruch, a legendary figure on Wall Street, once remarked, “Gold has worked down from Alexander’s time… When something holds good for two thousand years, I do not believe it can be so because of prejudice or mistaken theory.”

While the markets may change, the enduring value of gold stocks remains constant, guiding investors to consider the wisdom of seeking refuge in hard assets. As we navigate the currents of the modern investment landscape, embracing the lessons of the past and incorporating gold stocks into our portfolios can prove to be a prudent and rewarding strategy.

FAQs

Q : What was the significance of gold stocks during the Great Depression?

A : Gold stocks served as a safe haven during the Great Depression, providing investors with a hedge against market volatility and economic turmoil.

Q : How did gold mining companies perform during the Great Depression?

A : Gold mining companies demonstrated resilience during the Great Depression, with some experiencing significant growth and outperforming other asset classes.

Q : Did gold stocks outperform traditional investments during the Great Depression?

A : Yes, gold stocks, particularly Homestake Mining, delivered impressive returns during the Great Depression, outperforming equities and interest rate-sensitive assets.