Looking at four major financial shocks shows Gold’s outperformance
Don’t think you should own Gold right now? Think again.
Here we will consider four major financial shocks and how gold performed versus the most popular traditional asset class the stock market in each of these four scenarios which all occurred within the last 30 years.
Black Monday 1987 Stock Market Crash
In 1987 stocks fell a whopping 38.9% from their peak to October crash. At the same time, Gold rose 5%. Stocks did eke out a paltry 2.26% gain in 1987. Gold rose more than 20%.
Though no one understood this at the time, the ultimate primary cause of the 1987 Black Monday stock market crash turned out to be computer program trading. Financial institutions were employing the still fairly new technology in order to safeguard their holdings against substantial weakness in the stock markets.
The irony was that the program trading which had been designed as a hedge magnified market weakness as the crash began. Computer programs were set up to automatically liquidate particular stocks as specific loss limitations hit. This pushed the prices still lower. Continuously dropping prices on Black Monday created still more liquidating. As these programs then ceased all buying, the universally used algorithms at the time caused the buy bids to simply disappear. In the end, stocks had dropped by 22% in a single day.
Iraq Invasion of Kuwait 1990 Stock Market Decline
After Iraq invaded Kuwait in 1990, stocks fell nearly 22.5%. Gold rose more than 7.5%. 1990 saw stocks lose about 4.3%. Gold posted a negative return too. But, it outperformed stocks by a factor of three.
This invasion of energy-rich Kuwait sent oil prices as well as oil and gold stocks higher. Car manufacturer and airline company stocks were crushed. Stocks were fortunate to end the year positive at all, considering that this Iraqi invasion of Kuwait led to a seven month occupation of the country which only ended when the United States led coalition forces to victory, driving out the Iraqis in what became known as the Gulf War. Especially damaging to world oil prices was the Iraqi cheap parting shot, setting 600 oil wells in Kuwait on fire as they retreated back to Iraq.
Dot Com 2001 Stock Market Correction
In the summer of 2001 the Dow lost more than 27%. Gold gained slightly more than 1%. For the year, stocks lost about 7%. Gold remained positive.
This became known as the Dot-com crash. While it most severely affected the NASDAQ market (which took 15 years to recover to its pre-crash highs), this massive pullback was severe enough to cause a correction in the entire stock market. It was caused by the irrational exuberance (made famous by former long-time Federal Reserve Chairman Alan Greenspan) of the stock markets rising so dramatically in both Internet segments and the overall technology industry from 1995 to 2001.
Companies which had no realistic chance of ever turning a profit saw their valuations double and even triple in this technology- and Internet-driven stock market bubble period. It took three years for the markets to recover into technology investing and speculating in what became known as Web 2.0 by 2004.
Financial Crisis/Great Recession 2008 Stock Market Crash
From the beginning of 2008 until October 27th, stocks lost nearly 39%. Gold, down too, still outperformed stocks by a factor of two. Stocks lost about 34% in 2008. Gold provided a 5% gain.
In the year 2008, the global economy met its most dangerous match since the terrible years of the Great Depression in the 1930s. Contagion that shook nearly the world began in 2007 as outrageous housing prices within the United States at last began to correct decisively. This quickly enveloped the whole American financial sector before spreading to British, European, and rest of world financial markets. It soon became known ominously as the Financial Crisis.
Casualties within the U.S. comprised all of the following in a falling domino-like sequence of catastrophic events:
- The largest insurance outfit in the U.S. and world – AIG
- All of the investment banking firms – most dramatically Lehman Brothers and Bear Stearns
- The two government sponsored enterprises which facilitated mortgage loans in the U.S. – Fannie Mae and Freddie Mac
- The biggest savings and loan in the United States – Washington Mutual
- Largest mortgage lender in the U.S. – Countrywide Financial
- Two of the biggest commercial banks – Wachovia and Citigroup
Other companies which required liquid credit conditions to operate similarly suffered heavily. The U.S. car manufacturing industry required federal help to survive the carnage. Banks stopped making loans which aggravated the situation. In the wake of the massive stock market plunge that year, a severe, painful, and lasting recession encompassed the majority of the world. Some developed countries like Greece have never fully recovered ten years later.
By December of 2008, the National Bureau of Economic Research stated that the recession which had begun in December of 2007 within the U.S. had already become the third longest-lasting recession since the Second World War in the United States.
Gold is a great hedge against declines in “paper” assets. Adding Gold to a portfolio can enhance portfolio returns without additional risk.
Still don’t think you should own Gold in your retirement accounts right now? Think again.