Mining Stocks & the Y2K Crash
The following article indicates that mining stocks performed well during the Great Depression. Any opinions on whether mining stocks will be a relatively safe place for funds when the Y2K problem breaks the current equity bubble?
All feedback would be greatly appreciated, as I am currently accumulating mining stocks such as PAASF, DROOY, RANGY, etc.
GOLD STOCKS AND THE GREAT CRASH OF 1929 REVISITED
The immutable cyclic nature of investment markets - exacerbated by the
IRRATIONAL EXUBERANCE demonstrated in the current market mania - force
a prudent person to conclude that there will be a secular money change
from financial assets to real assets (probably soon).
The euphoric mania in stocks and bonds in recent years has clouded the
common sense of Wall Street's rather youngish money managers. Throwing
all caution to the winds of greed, the go-go investment gunslinger
mentality of the late 60's and early 70's is back again - screaming:
"THIS TIME IT'S DIFFERENT. ALL-TIME HIGH MARKET VALUATIONS ARE NO
LONGER VALID BAROMETERS, NOR INDICATIVE OF INVESTMENT POTENTIAL!" Many
years of garnering market wisdom has taught me the value of prudence
and patience, and that youthful exuberance is always the last refuge
of the inexperienced. Sooner or later their bubble will burst - and
market focus will return to seek cyclic intrinsic values and
traditional refuge investment vehicles.
"That which has been is that which will be,
And that which has been done is that which will be done."
Solomon
What Happened to Gold Stocks in the Great Crash Era (1929 - 1935)?
In October 1929 equities had reached unprecedently high levels of
valuation. Although there were several causes of the 1929 crash, much
of the blame may be attributed to the abuses of the infamous
investment trusts - which enjoyed wildly accelerated growth from 1924
to 1929.
It is interesting to recall that the investment trusts of the 20s were
the forerunners of what we refer to today as mutual funds. It was
primarily through the channeling of the public's savings via the
investment trusts that drove stock valuation ratios to astronomical -
indeed unrealistic - levels in late 1929. Unfortunately, there was no
securities' law nor S.E.C. at that time to curtail market abuses,
manipulations and/or excesses leading to the bear market debacle which
followed. Nor was there a Fed Chairman cautioning that "IRRATIONAL
EXUBERANCE MAY RESULT IN A FINANCIAL ASSET BUBBLE!"
Financial assets as reflected by the Dow Jones Industrial Average
(DJIA) reached its peak value of 385 in October 1929, marking the
beginning of our country's worst bear market. And although the DJIA
finally bottomed at 41 in June 1932, the vast majority of stock
investors continued to suffer the effects of the languishing bear
market during the next three years. By December 1935 the stock market
(DJIA) had only recovered to 140 from its 1932 bottom -- still down a
whopping 64% from its October 1929 peak.
As might be expected, interest rate sensitive equities were also
decimated during the Great Crash of 1929. In September 1929 the Dow
Jones Utility Average (DJUA) hit its peak at 145. From late 1929 the
DJUA tumbled to its abysmal l o w of only 15 in March 1932 and again
in March 1935. The interest rate sensitive utilities had plunged a
cardiac arresting 90% from their unrealistic and lofty 1929 highs.
Three years after hitting its nadir, the DJUA was still severely
depressed. Imagine: A $10,000 investment in the relatively "safe"
utilities in late 1929 was only worth a mere $2,100 on New Year's Eve
1936! This is heart-wrenching financial history...
What Did Smart Money Do In the 1929 Crash and Aftermath?
During the same bear market period smart-money moved from the plunging
equity markets (i.e. financial assets) to hard asset investments, like
Homestake Mining - which is used heretofore as a surrogate for all
gold stocks.
The stock price of this gold mining company soared relentlessly upward
during the entire bear market. Homestake Mining stock rose
continuously from $80 in October 1929 to $495 per share in December
1935 - which represents a total return of 519% (excluding cash
dividends) during the devastating bear market period.
Contemplate and appreciate the monumental difference in investment
returns during a serious bear market. Smart-money invested $10,000 in
Homestake Mining (hard assets) in late 1929 - which increased in value
to almost $62,000 by December 1935. This represents a compound rate of
return of 35% per year in appreciation alone!
It is meaningful to note that in late 1929 the value of Homestake
Mining was about $80 per share. Moreover, during the next six years
Homestake Mining paid out a total of $128 in cash dividends. In fact
the 1935 dividend alone reached $56 per share. That's almost a 70%
dividend yield payout (basis 1929) in only one year! Indeed, hard
asset investments (gold mining shares) were islands of economic refuge
during the grueling years of the Great Depression.
Unfortunately, those innocent souls who remained invested in stocks -
and had a buy and hold strategy - saw their initial $10,000 investment
slowly dwindle to only $3,600 by late 1935. This represented a
devastating capital loss of almost two-thirds of their investment
savings. T H A T'S R I G H T! The hapless naive investor with a buy
and hold strategy in financial assets lost the greater part of his
original stake. Pathetically, he could ill-afford to risk - let alone
lose - his precious capital during the many long despairing years of
the Great Depression.
One does not have to be a Ph.D. in higher mathematics to understand
the 1929-1935 comparative investment results stated below.
Investment Investment Investment
Vehicle Date Amount Value @ Dec. 1935
DJIA Oct - 1929 $10,000 $3,600
DJUA Oct - 1929 $10,000 $2,100
Homestake Mining Oct - 1929 $10,000 $62,000
Note: For simplification cash dividends not taken into
account
It is a nightmarish thought for the Buy-N-Hold advocates to take
careful note that it took the next 25 years for a 1929 investment to
break even! Not even Job of the Bible would have had the patience to
wait.
What Happened During the Next Great Market Crash (1973/1974)?
From the market high in 1973 to its low in 1974 the DJIA and the S&P
500 lost almost half their value - while the previously high-flying
technology stocks plummeted more than 60%. Enough to cause
heart-failure to the credulous believers of THIS TIME IT'S DIFFERENT.
Even the relatively "safe" utilities were decimated - as they dropped
more than 50% from their 1973 high to their nadir in 1974.
H-O-W-E-V-E-R, students of financial history took profitable refuge in
gold metal stocks. The Gold Mining Index, composed of ASA, Campbell
Red Lake and Dome Mining, appreciated more than 260% from its 1973 low
(40) to its 1974 high (147). This merits being redundant. During the
severe 1973/74 bear market, stocks lost half their value - while gold
mining companies almost quadrupled.
The over-riding guideline of my precious metals' research was aptly
described by one of Wall Street's legendary wizards, Bernard Baruch -
unfortunately, unknown to most of today's investment Pollyannas. His
observation still rings with logic and clarity:
"Gold has worked down from Alexander's time.....
When something holds good for two thousand years,
I do not believe it can be so because of
prejudice or mistaken theory."
Current Outlook for Stocks Is Grim
The 'IRRATIONAL EXUBERANCE" of 1996 has surpassed the market mania of
1929. Traditional stock valuation indicators are at all-time record
dangerous levels. The DJIA dividend yield plummeted to a century low
(2.01%). The price-to-book ratio soared to the all-time record of
4.96:1, and the P.E.R. (price to earnings ratio) currently at 19 is
greater than that of October 1929. Whenever these astronomical and
unrealistic levels were reached, a vicious bear market eventually and
inevitably followed.
In light of the current condition of all markets, prudence and
patience will indeed conserve wealth and provide material rewards.
Lamentably, those ignorant of financial history and the
chronologically inexperienced will undoubtedly suffer once again the
wages of unbridled greed and an acute myopic view of financial
history.
Sage Advice from Ecclesiastes
Although my opinion and predictions are based upon intermarket and
technical analysis, complemented by historical/statistical evaluation,
prudence forged by many years of international investment experience
forces me to echo the sage biblical and appropriate advice of
Ecclesiastes :
"WISDOM EXCELLETH FOLLY
AS FAR AS LIGHT EXCELLETH DARKNESS."
but Ecclesiastes also cautioned
"I RETURNED, AND SAW UNDER THE SUN, THAT THE
RACE IS NOT TO THE SWIFT, NOR THE BATTLE TO
THE STRONG, NEITHER YET BREAD TO THE
WISE, NOR YET RICHES TO MEN OF
UNDERSTANDING, NOR YET FAVOR
TO MEN OF SKILL; BUT TIME
CHANCE HAPPENETH
TO THEM ALL."
vronsky
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