the bear market ALMANAC
an ounce of gold has been about equal to the price of a decent men’s suit. What really drives the price of gold is the currency it’s valued in. When the dollar is strong in relation to other currencies, the price of gold goes down. And when the dollar weakens, the price of gold goes up. With rising debt levels, investors may want fewer dollar-denominated bonds, which will reduce the demand for dollars. Also, with fears of slowing growth, the Federal Reserve may lower interest rates in the future to try and keep the economy afloat. That should cause the dollar to fall as well. If history proves to be true, gold should be a safe spot to park your money during the next big market drop. And to look at the most recent data, when the stock market dropped 19% from October to December, gold tacked on 12%... and went on to rally 24.3%. And finally, the third way to protect your investments against a bear market is to buy put options. By definition, put options are contracts that give buyers the right to sell a stock at a specified price. You can think of put options as a form of insurance against your portfolio. You pay a premium for it. And just like with home or flood insurance, you hope you never have to use it. But when there is a disaster, you’re happy you have it. The next chart shows the CBOE Volatility Index (“VIX”) – also known as the market’s “fear index” – and the monthly returns for the S&P 500.
demand keeps prices up. That’s why I like to call gold a “chaos hedge.” I’ve long maintained that part of your portfolio belongs in gold as protection for when things in the economy get ugly. Historically, the performance of gold proves that to be true.
Bear Markets
START
END S&P 500 TOTAL
RETURN GOLD RETURN
4/29/11
10/3/11 3/9/09 10/9/02
-15.80%
6%
10/9/07
-51.8%
25%
1/4/02
-27.9% -24.1%
14.7%
3/24/00 9/21/01
2.3%
7/17/98
8/31/98
-19%
-6.4% 6.8% 8.4%
7/16/90 10/11/90
-20.3% -34.7% -27.66%
8/25/87
12/4/87
AVERAGE:
8%
The price of gold has only gone down once in the past seven bear markets. The returns haven’t been spectacular, but eking out an 8% profit when other investors see their wealth get cut by a fourth is a win. The question is: Will gold hold up during the next bear market? First, it’s important to look at what really drives the price of gold. Gold is a commodity, but it’s different than other commodities. Unlike oil or platinum or soybeans, gold doesn’t have much real industrial use. You can’t build a skyscraper out of gold. It can’t warm your home at night. It’s just a globally accepted store of value. And gold’s real value doesn’t change. Throughout history,
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October 2019
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