The following article is adapted from a
brand-new eBook on gold and silver published by Robert Prechter, 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,
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
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
Conquer the Crash and
Elliott Wave Principle and editor of
The Elliott Wave Theorist monthly market letter since 1979.