For the benefit of our readers, we have posted our Gold Stock Indicator to help identify the best times to invest in precious metal stocks. However, as market historians, we’re aware that there are limits to the indicator. In the case of precious metal stocks, the period from 1925 to 1932 provides immense lessons on the possible outcome for gold and gold stocks going forward. In addition the implications could be far reaching for the U.S. and global economy.
Our question is, are we on the cusp of a deflationary collapse as was the case in the 1924 to 1932 period? If so, then our Gold Stock Indicator may be of little use. We’re not proposing this question to confuse our readers. On the contrary, we’re trying to test the assumptions and provide a balanced perspective.
To support our claim that a deflationary collapse could be eminent, we have posted the chart below depicting the decline of gold and silver stocks before the collapse of the stock market in 1929.
The above chart plots an equal weighted average of gold stocks that had price history from 1924 to 1933. Because Homestake Mining (HM) had a considerable impact on the “index,” we had to show the chart with and without Homestake. However, we based our analysis on the price without Homestake since it was a special situation in our opinion. We wrote a full article on HM titled “Homestake Mining: The Exception that Proves the Rule” on October 31, 2010 (found here).
What alarms us about the chart above is the fact that precious metal stocks and silver (as noted from the 1975 CRB yearbook) fell long in advance of the stock market crash from 1929 to 1932. It appears to us as though the precious metal sector was warning about the deflation that was just around the corner. However, the stock market masked the coming deflationary spiral by climbing to unbelievable heights to the 1929 peak.
Your thoughts appreciated.
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