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LAWRIE WILLIAMS: Silver gaining faster than gold. Equities should beware Labor Day.

Does history often repeat itself?  The answer is yes and given the current parallels to the 1929 equity market performance, general equity investors should be hugely wary of the likely market activity once America returns from its traditional Summer holiday period, which is seen as ending on Labor Day (September 3rd this year). Gold and silver already seem to be beginning to make a move upwards as September begins.

There will be few around who remember that fateful day in 1929 when markets turned sour, which coincided, as things tend to do, with post-Labor Day  market activity,  Economic historians should, though, perhaps be drawing their own negative conclusions from what happened almost exactly 91 years ago when Labor Day 1929 was, in retyrospect, seen as the start day of the Wall Street Crash.  Like today, equities markets had been rising like there was no tomorrow post an initial market slump earlier in the year which, in retrospect, should have provided a warning of what might be to come.

The Wikipedia entry on the Wall Street Crash looks like it could have been written about the current year.  I quote: ‘Despite the dangers of speculation, it was widely believed that the stock market would continue to rise forever [plus ça change]: on March 25, 1929, after the Federal Reserve warned of excessive speculation, a small crash occurred as investors started to sell stocks at a rapid pace, exposing the market's shaky foundation. [There was a similar ‘small crash on March 23rd of the current year]. Two days later, banker Charles E. Mitchell announced that his company, the National City Bank, would provide $25 million in credit to stop the market's slide.  [For the National City Bank move back then substitute U.S. Fed and Government support now]. Mitchell's move brought a temporary halt to the financial crisis. However, the American economy showed ominous signs of trouble: steel production declined, construction was sluggish, automobile sales went down, and consumers were building up high debts because of easy credit.  [The parallels with the COVID 19 inspired recession effect on the U.S. economy this time around have to be somewhat ominous].

The Wikipedia entry continues (edited for brevity here): ‘Selling intensified in mid-October. On October 24, "Black Thursday", the market lost 11 percent of its value at the opening bell on very heavy trading.  On October 28, "Black Monday" more investors facing margin calls decided to get out of the market, and the slide continued with a record loss in the Dow for the day of 38.33 points, or 12.82%.  The next day, the panic selling reached its peak with some stocks having no buyers at any price. The Dow lost an additional 30.57 points, or 11.73%, for a total drop of 23% in two days. After a one-day recovery on October 30, when the Dow regained 28.40 points, or 12.34%, to close at 258.47, the market continued to fall, arriving at an interim bottom on November 13, 1929, with the Dow closing at 198.60. The market then recovered for several months, starting on November 14, with the Dow gaining 18.59 points to close at 217.28, and reaching a secondary closing peak (bear market rally) of 294.07 on April 17, 1930. The Dow then embarked on another, much longer, steady slide from April 1930 to July 8, 1932, when it closed at 41.22, its lowest level of the 20th century, concluding an 89.2% loss for the index in less than three years.’

Yes, the situation may be different today – perhaps it could prove to be even worse with the coronavirus at least in part dictating events.  But the propensity for investors to follow the herd has to be worrying to say the least.  A complete change of equity market sentiment starting next week after the U.S. holiday end cannot be ruled out and if this happens we could see exactly the same pattern occurring as back in 1929.  The portents have to be worrying for the equity investor.  Some well-respected economic pundits have been expressing the opinion that a mega-crash is imminent for some time, while other hugely successful investors have been sitting the recent market shenanigans out in the anticipation of this likely crash occurring.

We’re not saying that a crash of the above proportions is inevitable, but some form of correction   would seem to be likely given the almost unprecedented rise in equity valuations in the face of mostly static or declining corporate earnings.  It is only probably the depth of the downturn that remains in question.

But what of gold and silver in the above scenario?  It is probably only the seemingly unstoppable rise in equities which has taken investment away from these perceived safe havens.  After all who needs safe havens when equities are only rising and look as though they will continue to do so ad infinitum despite the U.S. being in the throes of the deepest recession ever recorded!  OK – sarcasm is supposedly the lowest form of wit.  Guilty as charged!

Should equities start to turn down we could see a flood of investment into gold and silver bullion and ETFs.  The way things have been going in the precious metals sector of late, silver has the potential to rise the faster, although gold remains very much the financial bellwether.  However gold has already exceeded its all-time dollar high, whereas silver still has a way to go if it is to get close to its most recent (March 2011) high point of just short of $50.  We think it does have a chance of achieving this kind of level this year even, should its upwards momentum revert to the kind of volatility seen early in the past month, although we consider such a rapid upwards move unlikely to its full extent this year.

But looking ahead to 2021, if the U.S. economy remains in recession, unemployment stays at or around current levels and bankruptcies and corporate collapses continue unchecked, anything could happen.  Gold could well hit the $3,000 mark at some time during the year and silver attack the $50 level once more now the floodgates, which had been holding silver back, appear to have opened.  This implies that silver will continue to rise faster than gold – although as mentioned above the gold price remains as the economic bellwether which needs to be followed as giving a guide to where silver might well end up.  Our mantra now is ‘Watch gold and buy silver’.  Investment in gold and silver mining stocks could even show better returns with the stronger producers paying good dividends too, which would be an added bonus.

01 Sep 2020 | Categories: Gold, Silver

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