“What’s the deal with gold right now?” you might be asking.
“I thought it was a crisis hedge, Steve. But the metal has been falling.”
If you own any gold – or were thinking about buying some – these are valid concerns. Lots of folks think of gold as a hedge against uncertainty. And that’s usually the case.
Why, then, is gold down double digits in less than two weeks?
Gold isn’t broken. Don’t worry about that.
In fact, if we look at history, this action makes a lot of sense.
This might surprise you… But when crisis hits, history says you shouldn’t expect a big pop in gold right away.
Let me explain…
This goes against the conventional wisdom. Most folks believe gold is a crisis hedge that immediately goes up when stocks crash. But it isn’t always that simple.
Yes, gold is a crisis hedge. And it does its job. But the way it gets there isn’t what most would expect.
The Great Recession of 2008 is the perfect example. Take a look at how this major gold fund performed compared with U.S. stocks…
This isn’t what you’d expect. As the housing crisis unfolded, gold chopped sideways, largely falling alongside the S&P 500. It looked like investors had no safe haven… But that wasn’t the case.
In reality, the issue was patience.
Investors who got into gold as the crisis unfolded did incredibly well… eventually. It just took a little time. But just about any investment in gold – whether during or after the crisis began – led to outperformance over stocks. The chart below shows it…
Look at how gold did compared with stocks if you’d bought in early 2008 as the crisis hit…
Despite the initial chop, gold massively outperformed stocks if you’d bought as the crisis began. It’s more than that, though…
In 2009, even as the market recovered, gold was the better bet.
If you had bought stocks in April 2009, just a month after the S&P 500 bottomed, you would have underperformed gold over the next year. Fast-forward to 2010, and the story is still the same… Gold buyers outperformed the market over the next year.
That may seem crazy. But it was true for buyers getting in at the beginning of 2011, too. Even a recent crisis tends to mean big opportunity in gold.
This should get your attention. For the first three years of the recovery, gold was the outperformer. Not stocks.
We’re starting to see this play out again now…
The news of the coronavirus broke in January. And you might have expected to see a big jump in gold prices. After all, a new SARS-like infection is darn scary.
The metal did jump at first, before stocks started falling. But it has fallen alongside stocks over the last couple of weeks.
This is similar to what we saw in 2008. Gold tracked stocks as the crisis began to unfold… Then, over the coming years, it dramatically outperformed thanks to low rates and high fears.
We’re likely in for a bit of chop before gold dramatically outperforms. That’s exactly what happened last time. But the important thing for precious metals investors is that you don’t need perfect timing.
In times of crisis, you shouldn’t worry about timing the gold market exactly right. You just need to take advantage of the near-certain rally over the long term.
So yes… if you only glance at the gold market, it seems odd right now. But if you dig deeper, you’ll see that things are playing out exactly as you’d expect.
History says that buying gold today is a recipe for long-term outperformance. All you’ll need is a little patience.
Good investing,
— Steve Sjuggerud
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Source: Daily Wealth