Physical gold should be seen primarily as the mechanism of wealth preservation; a private asset that will be there when you or your family needs it. Physical gold should be a significant part of a diversified portfolio. Physical gold has always had value. Total speculation can make you rich, but total speculation can also bankrupt you. Those investors, who get out near the peak, escape the carnage of the fall. Those who buy near the top: risk losing it all.
Today we have more corporate debt, government debt, and consumer debt than ever in history. The S&P 500 is up over 250% in the last ten years. The NASDAQ is up over 450% in the last decade. These are truly remarkable moves. These gains can be attributed to innovation, good business models, cheap money, and mostly debt. These remarkable moves come after a horrible 2008 financial crisis where many lost everything. Not everyone has twenty or thirty years for the markets to come back after horrific drops. In this week’s article, we again look back at three startling drops in stocks after long tremendous run-ups. This information was covered in a Midas Gold Group news article from about seven months ago.
Stock market boom leading up to the October 1929 crash
In October of 1929, the stock market crashed, wiping out billions of dollars of wealth and heralding the Great Depression. Known as Black Thursday, the crash was preceded by a period of phenomenal growth and speculative expansion. A glut of supply and dissipating demand helped lead to the economic downturn as producers could no longer readily sell their products. The Dow rallied 600% from 1921 to 1929. Some of the stocks of this period were RCA, Union Carbide, AT&T, Allied Chemical, American Can, American Locomotive, American Sugar, International Harvester, Kennecott, Paramount, Texas, GE, Sears, US Rubber, and American Car & Foundry. The Dow peaked at 381 in 1929 and didn’t reach that level again until 1954.
The crash began on Oct. 24, 1929, and the market opened 11% lower than the previous day’s close. The markets saw losses of 13% on the following Monday, and losses of 12% on Tuesday. Although the price of many large, blue-chip stocks declined, smaller companies suffered even more, forcing companies to declare bankruptcy. Many speculative stocks were delisted from stock exchanges. Many factors went into this crash including speculating as a hobby, investors buying stocks on margin, overproduction of goods, tariffs, new layaway payment plans, bank loans, and high consumer spending up to that point. From peak to trough, the Dow saw a drop of over 89% in roughly three years. Historical data confirms that the aggregate gold price was stable at $20.67 per ounce during this period. Physical gold acted as wealth preservation during the stock market crash of 1929.
Gold acted as wealth preservation during the October crash of 1987
The Nifty Fifty was a group of 50 stocks identified by market commentators in the 1960s, although it was never an official benchmark index. The group included Revlon, Procter & Gamble, Philip Morris, Pepsi, Pfizer, Merck & Co, Eli Lilly, Coca-Cola, IBM, Gillette, Wal-Mart, Disney, Eastman-Kodak, and Polaroid. It was said by many investors at the time that Nifty Fifty stocks should be bought and never sold. By the early 1970s, the highest rated companies, darlings of the market, were trading on stunning valuations of 70 to 100 times earnings. Many of these stocks had a very poor performance for decades.
In 1971, the fiat currency experiment started and the Gold Standard was officially eliminated for a temporary period of time.
There were some warning signs of excesses that were similar to excesses at previous inflection points. Economic growth had slowed while inflation was rearing its head. The strong dollar was putting pressure on US exports. The stock market and economy were diverging for the first time in the bull market, and, as a result, valuations climbed to excessive levels, with the overall market’s price-earnings ratio climbing above 20. Future estimates for earnings were trending lower, but stocks were unaffected. The Plaza Accord of 1985 saw the Fed and Central Banks depreciate currencies. In the five years proceeding October 1987, the DJIA more than tripled in value, creating excessive valuation levels and an overvalued stock market.
On Oct. 19, 1987, the Dow fell 23%, from 2,246.73 to 1,738.74. The index saw roughly a 30% drop that month in volatile trading. Gold traded up roughly 2% that month and held its value. The loss of liquidity from this crash led to the savings and loan crisis in 1989. Not everyone has the wallet or stomach for that kind of drop. During that horrific month for stocks in 1987, gold did its job and acted as wealth preservation.
Stock market boom leading up to the 2000 Dotcom bust that lasted almost three years
Leading up to 2000 many investors were eager to invest, at any valuation, in any dot-com company, especially if it had one of the Internet-related prefixes or a “.com” suffix in its name. At the height of the boom, it was possible for a promising dot-com company to become a public company via an IPO and raise a substantial amount of money even if it had never made a profit—or, in some cases, realized any material revenue. Between 1995 and its peak in March 2000, the Nasdaq Composite stock market index rose 400%. Raising venture capital was easy.
The bubble burst in early 2000, and by October 2002, Nasdaq had given up all its gains during the bubble. Many online shopping companies, such as Pets.com, Webvan, and Boo.com, as well as several communication companies, such as WorldCom, North Point Communications, and Global Crossing, failed and shut down. Companies that survived like Amazon, Cisco, and Qualcomm saw drops of nearly 90%. High debt ratios bankrupted many companies. It took 15 years and much pain to regain the NASDAQ peak in 2015. Gold was $280 a troy ounce in 2000 and was roughly $320 a troy ounce by 2002. During this period while many made speculative fortunes and many lost speculative fortunes, physical gold acted as wealth preservation.
Wealth preservation is the name of the game
We now have a whole new generation of investors but it’s the same game. The bubble could get bigger of course, but it can also be pricked at any moment. This game now though is being played in a much bigger debt minefield. Global debt was $80 trillion in 2000, now it is almost $300 trillion. Global property developers have to be in trouble. Investors are hoping that central banks will always save the day with free handouts and continued market control. Central banks around the world have turned into hedge funds, owning stocks, ETFs, and bonds.
Federal Reserve Chairman Jerome Powell sold up to $5 million worth of stock last October, according to a new financial disclosure form, shortly before the Dow Jones Industrial Average cratered. How is it ethical that the Fed Chairman trades stocks while also controlling monetary policy?
As congressional spending and speculation continue at nose bleed levels, why would anyone think that this all-time everything bubble will turn out any differently than 1929, 1987, or 2000? Oh yes, it actually may turn out differently, it will be much worse. Smart investors turn to physical gold to protect their nest egg in a period of such financial recklessness.
