Mark, Ike asked me to comment...as a matter of fact, there is no correlation between gold stocks and the stock market in general worth mentioning in 'normal' times, neither negative nor positive. i.e., the gold stocks live in their own universe, tied to the fortunes of the dollar and gold (the negative correlation of the dollar to gold is over 80%).
HOWEVER, in both supercycle bear markets over the past century (the 1930's and the 1970's) gold stocks were by far the best performing sector of the market.
from 1930 - 1935 for instance, the value of Homestake Mining (HM) rose about ten-fold, while the rest of the market simply collapsed. the dividend HM paid in '35 covered the cost of purchasing the stock in '29 immediately after the crash.
in the late 70's, a similar phenomenon occurred: for instance, you could buy Durban Deep's stock (DROOY) for about 2 dollars in '78...in '80, it went as high as 52 dollars, and paid a dividend of slightly over 2 dollars if i remember correctly.
it is pretty obvious why gold stocks perform well during times of strong inflation, it is less obvious why they do so during outright deflation as well.
the reason is that the purchasing power of gold tends to rise strongly during deflationary times, as its price tends to either be stable or even rise slightly (remember, gold is the ultimate form of currency - not bound by any government promises, and thus the currency of choice in times of crisis). the miners input costs however fall strongly during a deflation, and their profit margins thus rise. |
