The severity and the speed of the crash which occurred in the precious metals stocks caught us and practically everyone by complete surprise. The meltdown surpassed everybody's expectations and has no historical precedents.
However, when looking at the past 80-year history, there are a number of bear markets that carry some similar characteristics to the crash of 2008. The following six bear markets saw very significant corrections in mining stocks:
In 1929, there were no gold mining indices to speak of. The best indicator for the precious metal stocks was Homestake Mining, the biggest gold producer at the time. In the year of the crash, Homestake fell by just 30%. Other mining stocks fell by 50% or more. After the initial drop, gold stocks turned out to be the best performers. In that deflationary time, gold was as good as cash. In the following decade, which was marked by the Great Depression, Homestake rose by over 700%.
In 1939, precious metals stocks peaked together with the broad market. A severe bear market followed, lasting until 1942, as World War II raged on. In the course of 37 months, the newly formed Barron's Gold Mining Index (BGMI) fell by 67.3%. A sharp rebound followed in 1943, as the epic Stalingrad battle was won and Allies made greater progress in winning the war. In the following 17 months, the index appreciated by 94%. However, it took about 20 more years for the BGMI index to overtake its 1939 highs.
The following major bear market happened in the 21-month period between 1968 and 1970 as gold stocks were digesting its huge gains made is the 1960s. The BGMI index fell by 61.2% but made a partial recovery relatively quickly, gaining 68% in 10 months. Thereafter, consolidation continued for two more years until a huge rally began in 1973.
Another major bear market occurred in 1975 / 1976, after impressive gains made in 1973/1974. Over the course of 24 months, BGMI fell by 68.4%. The index retraced less than a third of its losses in the following six months and remained range-bound for about a year and a half before embarking onto a gigantic rally which quadrupled the index in two short years.
After the 1980 peak in gold, a 19-month bear market ensued. The $XAU index fell by a deadly 77.4% from 1980 to 1982. But the rebound that followed in 1982 was equally impressive as mining stocks recovered almost all they lost during the previous bear market. In just 7 months into early 1983, gold stock indices tripled - one of the most impressive rallies of modern times. This is despite the fact that gold was then trading at a much lower level than in 1980.
The latest and the longest bear market occurred between 1996 and 2000. In the period of 55 months $XAU fell by 73.1%. It took five years for $XAU to return to its 1996 highs.
In the past year, the ultimate high for $XAU was 209.28 set on March 14 on the Bear Stearns developments. In July, $XAU made a double top, hitting 206.21. From this level to a low set on Friday of 63.52, the total decline is now 69.2% in just three months.
While a couple of major bear markets showed slightly greater losses than what we have today, the decline in the 2008 bear market occurred in the shortest span of time ever, making it into a crash of largest proportions and without any precedents over the past 80 years.
For the past few weeks, it has felt as if the bear market in precious metal stocks cannot get any worse. But it has gotten worse, worse and much worse. It has been as if the precious metals mining and exploration companies are all going out of business imminently.
Yes, it would be foolish to say that it cannot get worse from here. But both math and history are on our side. It is now very probable that a sharp multi-week rebound of at least 50% to 100% is near. The bigger question is how long will it take the $XAU and the juniors to climb back to its 2007/2008 highs. The $XAU would have to rise by 220%, while many juniors would have to rise 500%, 1000% or more.
From the above historical observations we can conclude that major gold indices such as the $XAU, $HUI, BGMI and others can recover to their prior highs very quickly, sometimes even in less than a year. We can expect this today as well especially if gold begins to climb higher. However, most juniors (which now number in thousands) will never see their prior peaks of glory. Many of them will go out of business, others will be acquired, others will merge. The entire junior stock landscape is going to be redesigned. But high quality, cash rich junior producers and explorers which sit of good deposits will undoubtedly have a bright future.
This is an excerpt from the Resource Stock Guide Newsletter published on October 25, 2008.