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It is September 18, 1987, and – sensing that the US dollar is doomed and the American stock market is going to crash – you bet on the XAU index as a safe haven investment. 1-Month later your speculations come to pass: the US stock market suffers its largest single day decline in history, the US dollar is expected by many to blow-up, and after starting the year at $402 an ounce the price of gold touches $500 ounce in December 1987.
How profitable was the prescient investor that bet on the XAU as a long-term investment on September 18, 1987? Well, drum roll please, up until last week – when the XAU briefly traded above 155 – they had been holding a 18-year loss.
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This look at the performance of the XAU index could be called myopically selective. After all, during previous bouts of financial market uncertainty – namely the 1930s and late 1970s – gold stocks performed remarkably well when most stocks did not. Moreover, whereas gold was trading between $400-$500 an ounce during the 1987 rally, today the price of gold is eyeing $600 an ounce (or level last seen in 1980).
Nevertheless, rather than blindly trumpet the advantages of owning gold stocks during tumultuous financial times, it is important to remember that sometimes gold stocks act like most stocks do. With the average gold producer yielding less than 1% in dividends and trading at a trailing P/E multiple a 38 – unattractive figures compared to the average US stock - this could be important for the speculator to remember.
As for the price of gold, with geopolitical uncertainties not expected to ebb anytime soon and the commercials seemingly having lost their once unshakable grip on the market, there is ample reason to be optimistic. Moreover, the historian might remember that during 1987 – as the POG gained and confidence in the US dollar declined - that trade deficit [adjustment] fears were bubbling, people feared a foreign investment exodus from America, the White House (Reagan) actually stated it was opposed to any further fall in the dollar, and Secretary of the Treasury James A. Baker suggested that the US ‘Peg the Dollar's Value to Commodities’. Point being, 18-years after a wild year for the US dollar the US trade deficit has reached once unthinkable levels, reliance on foreign investment continues to reach record highs, and no one seems concerned that the US dollar is about to fall off a cliff. Once, and if, the US dollar starts to seriously decline and investors begin to fear that imbalances have reached a breaking point, there may not be a 18-year break before gold resumes its bull run.
With this in mind, maybe this time, or during the next stock market collapse, things will be different for overvalued gold stocks? Maybe, but I wouldn’t bet on it. Sometimes gold stocks act like most stocks do.
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