Are we facing a plunge in global stock markets like in 1973-4 and how will gold react?
Posted on 26 December 2011 with 7 comments from readers
The January edition of the ArabianMoney newsletter is warning readers how to prepare for a 1973-4 style plunge in global stock markets (subscribe here). During that period of the first oil shock the Dow fell by 50 per cent and the gold price doubled from $100 to $200 an ounce.
We have previously drawn the comparison between the late 60s and early 70s and the era we have been living through. There was a series of economic shocks and money printing to pay for the Vietnam War leading to inflation, then compounded by the Arab oil embargo that sent the price of crude spiralling.
Markets too high
Financial markets then correctly decided that a recession or long period of slow growth and high inflation was ahead, and adjusted prices dramatically to reflect that economic reality. Today equity markets may look cheap in historic terms but they are not at levels typically marking cyclical bottoms – and that is where you would expect them to end in a really bad year.
From a techical perspective chartists such as Hubert Moolman note the repetition of a pattern seen in the late 60s and early 70s with a triple head in the Dow and then a decisive plunge. If the parallel is correct then we look to be at the end of the third head and about to plunge downwards.
On that assumption the Dow could bottom at 6,000. We doubt it could go much lower because of the obvious policy response by global central banks who would far rather print their way to higher inflation than see a depressionary deflation. That policy reaction also happened in the mid-70s but crucially it did not prevent the stock market plunge, and indeed underperformance for the rest of the decade.
Hold gold?
Gold was a great defence in 1973-4, rising consistently and doubling in the two-year time period. But those with long memories will not forget the gold price crash of 1975-6 which came before the great surge of the last years of the decade.
However, if the Moolman chart overlay on the 70s is accurate then gold is definitely the place to hide in a crisis. It could be that those expecting gold to crash with the stock market are very wrong and the pattern that will be followed is 1973-4 and not 2008-9.
One way it can be different this time is if the time comparison shifts to an earlier era!
7 Comments posted by readers:
Interesting commentary here.
The famous economist and retired banker, Alasdair MacLeod stated last week that the net effect of central banks actions in 2012 (and beyond) will ignite hyperinflation and cause the gold price to go hyperbolic!
That is a very, very strong assertion to make . . . and please note that he used the term “hyperbolic” and not “exponential.” While I believe the gold price will rise substantially in 2012, it’s tough for me to conceive of the possibility of a “hyperbolic” move in gold.
Tell us, then, just what makes this particular instance different from 2008? MF Global? CFTC ruling on position limits for silver? You gotta offer something, otherwise it feels like 2008 all over again. I’m guessing silver might come down to about $24 in the coming month before bouncing back up to somewhere in the $30s.
If I had to guess I would say that gold will temporarily go down until the QE starts in earnest. But I don’t expect a BIG plunge.
I wonder how much further local markets have to fall, bearing in mind that Dubai has reached its lowest since 2004! If the above is factored in then it is especially not worth touching the markets here at all. Comment from a local analyst:
“Until big institutional investors take the lead, I don’t think the market will recover in the short-term. Volumes have fallen, brokerages are shutting down, and it’s a sorry tale. There seems to be no investors willing to come in and commit long-term capital.”
@ Stephanie:
Your question is a valid one, albeit not sufficiently answered by the Ed.
In my view, the MF Global debacle was the “game changer”, and a number of very smart folks believe that the crash of MF Global was orchestrated by the Gold Cartel, led by JPM, in order to further buy more time.
For info, go here:
Subject: Did Bankers Deliberately Crash MF Global to Crash Gold and Silver Prices?
Link: http://www.theundergroundinvestor.com/2011/12/did-bankers-deliberately-crash-mf-global-to-crash-gold-and-silver-prices/
Sidebar:
Although J.S. Kim doesn’t mention this in his commentary, it’s especially noteworthy that none other than JPM was the single beneficiary of MF Global’s assets; additionally, JPM was given “preferential treatment” by being allowed to buy MF Global’s assets at pennies on the dollar. Coincidence? I think not. Fortunately, the bankruptcy trustee is “looking into” why JPM received such preferential treatment.
I think Stephanie maybe right. Silver took one hell of a beating in the US closing down over 5% in one day. the next dip should be a good buying opportunity. I will be loading up under $25
@ Andy & Stephanie:
While it’s possible for silver to dip to $24, I kinda doubt it.
As most of us know, the mutual funds and hedge funds have negative returns for 2011, yet they want to “lock in” the gains they have for gold and silver, hence lots of selling yesterday to improve their bottom line performance for 2011.
I suspect that silver will snap back next week, although commodities in general, including gold and silver will continue to be under considerable pressure over the next few months.