Gold and Silver: Hedges Against a Financial Downturn?

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Gold and Silver: Hedges Against a Financial Downturn?
You might be surprised by the answer

By Bob Stokes
Fri, 11 May 2012 16:45:00 ET

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It's often said that gold and silver always go up during recessions and depressions.

But you might be surprised to learn that this widely-held belief is not even close to being true.

Let's start by looking at gold:

The first thing to point out is that gold did not make a nickel of U.S. money for anyone in any of the recessions and depressions from 1792, when the gold-based dollar was adopted, through 1969, a period of 177 years.

... In 1970, things changed dramatically. Investors lost interest in stocks and preferred owning gold instead, for a period of ten years. The same change occurred again in 2001...[but] recession had nothing to do with either of these periods of explosive price gain in the precious metals.

Elliott Wave Theorist, March 2008

During the 1970s and the period after 2001, gold's biggest price gains came during those years when the economy was expanding, not contracting. When the economy grows, liquidity is available and must go somewhere, which includes various investments such as gold.

That's why silver prices also rise during economic expansions. Read this excerpt from the November 2011 Theorist:

Silver has an even more pronounced relationship to economic cycles than gold does. [The chart below] shows the history of silver prices and economic conditions going back 40 years...Notice that all of silver’s strong price gains came during economic expansions. Then observe that all seven recessions since 1970 have coincided with falling silver prices. Finally, note that all four crashes in silver—those of 1973, 1980, 1982 and 2008—came during recessions.

So it's a myth that silver and gold are perfect hedges against an economic downturn.

The run-ups in silver and gold since 2008 have many precious metals bulls believing that the pullback in recent months is just temporary.

What do we see ahead for these two precious metals? I can say that the charts suggest right now is a good time to find out.

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Tags: economic depression, Elliott wave, Gold, gold futures, liquidity, market forecasts, platinum futures, recession, silver, silver futures, Traders

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