Precious metals can serve as a hedge against stock market tumbles, although in the medium term, they can reverse gains and cause significant losses. We should try to sell them opportunely.
Some of the falls or rises of the S&P 500 index, gold and silver, during 22 years, from January 2000, to February 2022, are outlined below. In the graph, the ones with the highest proportion are marked and numbered.
- The economic recession that began in 2000 caused the 49% drop in the index①. Gold (gold line) and silver (blue line) mantained levels. S&P (white line) began to stabilize in 2003. By 2004, precious metals accumulated gains of 68%.
- By mid-2006, the S&P 500 was up 64% from its 2002 low. Gold and silver extended gains to 234%, before falling 35% and 20%, respectively.
- From that lowest level in mid-2006, and prior to the great crisis of 2008, silver rebounded 117% and gold 70%②, while S&P rose 25%.
- The financial crisis of 2008 – 2009 produced huge losses across the board: S&P, -57%③; Silver, -56%; Gold, -25%
- Thereafter, as equity markets compensate some of the losses, silver soared 441% to hit its all-time high of US$48, and gold surged 173%④.
- Over the years, as the economy and stock markets improved, metals lost their shine. As of December 2015, silver accumulated losses of 72% and gold, 45%, from the highs of 2011.
- Also at the end of 2015, the S&P lost steam with a drop of 13.50%. Gold and silver served as hedges, rallying 47% and 29%.
- And again, during 2016, while the index rose, metals turned lower. Towards September 2018 and from the highest prices, gold lost 13%; silver, 31%. On this occasion, the drop in metals was anticipated to the 21% drop that the index would have.
- From then until before the outbreak of the pandemic, the S&P rose 44%. It was a good period also for metals: silver, +44%; gold, +32%.
- The start of the pandemic diminshed the index 36% and silver 29%. Gold resisted ⑤.
- During the hard days of the pandemic, silver skyrocketed 141%. Gold rose 40%, to a new all-time high.
- Still within the period of the pandemic, gold fell as much as 20%; silver, 25%.
- While metals lost strength and fell, the index continued to climb to accumulate 114% until the first days of January 2022 ⑥.
- And during this last phase in which the stock markets were affected by the mix of taking profits and the nervousness about the Russia-Ukraine war, the index has lost 12.50%, while silver and gold have risen a maximum of 9.3% and 6.7%, respectively. The reaction of precious metals has not been as good as on previous occasions; have not yet fully compensated for the losses the index, although it is true that the fall of the S&P 500 cannot yet be considered a crash.
In sum, beginning in 2000, the extraordinary gains in precious metals reversed the declines in the S&P 500, but over time, the improving economy and bullish markets meant the opposite.
For illustrative purposes only, the different percentages are shown in different time periods.
Column by Arturo Rueda
For Funds Society, Madrid