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History Shows Bear Markets In Stocks Are Bullish For Gold

Friday February 07, 2014 11:35

You've probably already heard of the Stock Trader's Almanac's famous "January Barometer." The indicator simply states: as the S&P goes in January, so goes the year.

Well, 2014 has gotten off to a bumpy start for U.S. equities and financial markets in general. Through Jan. 30, the S&P registered a 2.9% decline (and is unlikely to make it back to positive territory). The Dow Jones Industrials shaved 4.4% off their starting point for the year and global equities have been tanking as well. The Brazilian stock index is down 8.3% for the year, Hong Kong's Hang Seng has slid 5.5% and Japan's Nikkei has plunged 7.9% during January.


According to that January Barometer the odds favor U.S. stocks posting a down year in 2014. Overall, Stock Trader's Almanac says the indicator has seen only seven major errors since 1950, which translates into an 88.9% accuracy rate. Not bad.

So, what does this have to do with gold? Let's take a look back at the two most recent bear markets in U.S. stocks —the first from early 2000 to late 2002 and the second from October 2007 to the March 2009 low.

Gold gained during both of those bear markets in stocks. Nearby Comex gold futures rallied from $274.50 in March 2000 to $322.90 in October 2002 or a nearly 18% gain during that bear market in stocks.  And, looking at the second bear market in the last decade, nearby gold futures rallied from $724.30 in October 2007 to just over $1000 per ounce in early 2009, or up nearly 39%.

Gold gains of 18% and 39%, not bad, huh?

U.S. stocks are facing many headwinds in the months ahead, first and foremost that the current bull cycle is old —U.S. stocks have been rallying since the March 2009 low—which means this bull is nearly five years old. That’s old. The average length of U.S. bull markets in stocks is 4.5 years.

Also, this year sees mid-term elections in the U.S. and that year is typically the weakest year for stocks in the four-year presidential cycle.

And, did I mention Fed tapering?

Get ready. A pullback, which is generally defined as a 5-10% decline could be just around the corner. A correction is defined as a 10-20% move down and bear markets generally start at the 20%+ mark.

Gold is a traditional safe-haven. Investors like to flock to hard investments during times of paper asset depreciation. The last two bear markets in stocks show that. Bottom line? Stocks are vulnerable, and the last two bear markets have been bullish for gold.

By Kira Brecht, Kitco.com
Follow her on Twitter @KiraBrecht

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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