|
|
Does Gold Always
Go Up in Recessions and Depressions?
February 8, 2010
By Robert Prechter, CMT
The following article is adapted from a
brand-new eBook on gold and silver published by Robert Prechter in 2009,
founder and CEO of the technical analysis and research firm Elliott Wave
International. For the rest of this revealing 40-page eBook, download
it for free here.
I have often read, “Gold always goes up
in recessions and depressions.” Is it true? Should you own gold because
you think the economy is tanking? Whenever we hear some claim like this,
we always do the same thing: We look at the data.
The first thing to point out is that gold did not make a nickel of U.S.
money for anyone in any of the recessions and depressions from 1792, when
the gold-based dollar was adopted, through 1969, a period of 177 years.
Well, to be precise, there was a change in the valuation in 1900, when
Congress changed the dollar’s value from 24.75 grains of gold, the
amount established in 1792, to 23.22 grains, a devaluation of just six
percent total over 108 years. The government did raise the fixed price
from $20.67/oz. to $35/oz. in 1934, but that action occurred during an
economic expansion, not during the Depression. In 1968, gold finally began
trading away from the government’s fixed price. Even then, it slipped to
a lower price of $34.95 on January 16 and 19, 1970. So the idea that gold
always goes up in recessions and depressions is already shown to be wrong.
It did not go up in terms of dollars in any of the (estimated) 35
recessions or three depressions during that period.
What almost always does happen during economic contractions is that the
value of whatever people use as money goes up as prices for goods and
services fall. When gold is used as money, its value in terms of goods and
services goes up. But gold can’t go up in dollar terms when gold and
dollars are equated. So no one “makes money” holding gold under these
conditions. It is a fine point: What tends to go up relative to goods and
services during economic contractions is money, and when gold is
officially money, that’s how it behaves. What we want to know is how
gold behaves in recessions and depressions when it is not
officially accepted as money.
Many gold bugs say that because gold was a good investment during the
Great Depression, it is a “deflation hedge.” We addressed this topic
in At the Crest of a Tidal Wave (1995, p.357) and Conquer the
Crash (2002, pp. 208-209). At the time, government fixed gold’s
price, so it didn’t go up or down relative to dollars. Gold was a haven
during that time, the same as the dollar was, since they were equated by
law. But gold served as a haven because its price was fixed while
everything else was crashing in price during the period of deflation. Gold
bugs like to claim that gold would have gone up during that period had it
not been fixed, but the crashing dollar prices for all other things
suggest that in a free market gold, too, would have fallen. It would have
fallen, however, from a higher level given the inflation of 1914-1929
following the creation of the Fed. So gold became worth more in dollar
terms than it was in 1913, which is why it began flowing out of the
country. In 1934, the government finally recognized the new reality by
raising gold’s fixed price. Since 1970, markets have been in a large
version of 1914-1930, except that gold has been allowed to float, so we
can clearly see its inflation-related, pre-depression gains.
Observe that gold’s price remained the same for a Fibonacci 21 years
after the Fed was created in 1913; it was revalued in 1934. [Ed. Note: For
a full chapter on Fibonacci time considerations for gold, download
the 40-page Gold and Silver eBook.] Then it held that value
for 35 (a Fibonacci 34 + 1) years, through 1969. So aside from the
revaluation of 1934, the inability to make money holding gold during
recessions, depressions, or any time at all save for the day of the
revaluation in 1934 held fast for 56 (a Fibonacci 55 + 1) years following
the creation of the Fed. So even after Congress created the central bank,
no one made money holding gold in a recession or depression for two
generations.
In 1970, things changed dramatically. Investors lost interest in stocks
and preferred owning gold instead, for a period of ten years. The same
change occurred again in 2001, and so far it has lasted seven years. But,
as we will see, recession had nothing to do with either of these periods
of explosive price gain in the precious metals.
The period of time one chooses to collect data can make a huge difference
to the outcome of a statistical study. If we were to show the entire track
record from 1792, gold would show almost no movement on average during
economic contractions. If we were to take only 1969 to the present, it
would show much more fluctuation. To give a fairly balanced picture,
combining some history with the entire modern, wild-gold era, I asked my
colleague Dave Allman to compile statistics beginning at the end of World
War II. This is what most economists do, because they believe “modern
finance” began at that time and that things have been “normal” since
then. It’s also when many data series begin. So our study fits the norm
that most economists use. It also provides results entirely from the Fed
era, making it relevant to current structural conditions.
[Ed. note: To study the six tables revealing gold's performance record vs.
stocks and T-notes since WWII, download
the 40-page Gold and Silver eBook.]
Table 1 shows the performance of gold during the 11 officially recognized
recessions beginning in 1945. Although one could make a case for different
start times, we took the 15th of the starting month and the 15th of the
ending month as times to record the price of gold. The results speak for
themselves. Even though it is accepted throughout most of the gold-bug
community that gold rises in bad economic times, Table 1 shows that such
is not the case.
The only reason that the average gain for gold shows a positive number at
all is that gold rose significantly during one of these recessions, that
of 11/73-3/75. The average gain for all ten of the other recessions is
0.16 percent, almost exactly zero. The median for all 11 recessions is
also zero. If we omit the five recessions during which the price of gold
was fixed, the median gain is 3.09 percent.
For long-term forecasts and more in-depth, historical analysis for
precious metals, including the six revealing tables mentioned in this
article, download
Prechter’s FREE 40-page eBook on Gold and Silver.
Robert Prechter, Chartered Market
Technician, is the founder and CEO of Elliott Wave International, author
of Wall Street best-sellers Conquer
the Crash and Elliott
Wave Principle and editor of The
Elliott Wave Theorist monthly market letter since 1979.
Click
here to view current Gold & Silver market sentiment.
|
