I was scanning the news headlines on MarketWatch.com and came across this story, titled "Getting it Right and Still Losing." In the article by Mark Hulbert, it is mentioned that experienced investment newsletter writers Harry Schultz, Howard Ruff, and James Dines have lost a significant amount of their investment funds by investing in gold and silver during the market turmoil of the last year. According to Hulbert, the losses sustained by these three market professionals ranged from 64.9% to 70%.
Mark Hulbert's conclusion in this article is that although the newsletter writers had foreseen the coming declines, they didn't know exactly when they would occur and therefore were unable to take advantage of the profit opportunities by maneuvering their money on the opposite side of the market downdraft. Because Mark Hulbert has been reviewing newsletters for quite a while, it would appear that his conclusions about these three market professionals is accurate. Unfortunately, just as the newsletter writers got the gold market wrong, so too does Mr. Hulbert in his assessment of the actual reason why these people to failed come out winners.
Despite their experience, the mistake that Harry Schultz, Howard Ruff, and James Dines made is very simple. They believed that if the stock market was going to collapse, then gold and silver would be the place to invest all of your money. Unfortunately, when the price of stocks fall, so too does the price of gold, and to a greater degree, gold & silver stocks.
The only time that gold and silver prices rise at the same time that the stock market falls is when the government itself is on the brink of bankruptcy. While it may be the assertion of the newsletter authors that the government is on the brink of failure, the process of actually getting to that point requires a significant amount of bailouts.
So, what evidence do we have to show that gold and silver actually does go down more than the general stock market? Below is a table that shows the performance of the Dow vs. the price of gold and the gold stock index (XAU). This table was originally created by David Marantette, former publisher of the Goldstock and Dear Dow Letter. In his research, Marantette wanted to emphasis the importance of this concept so he included the available data from the period during a gold bull market (1975-early 1980) to make his point.
Marantette picked all periods that the Dow Jones Industrial Average fell by 10% or more and compared that performance with the price of gold until 1984 and the Philadelphia Gold Stock Index (XAU Index) from 1986 until March 2001. I gathered the data from May 2001 until October 2007. Take note of the fact that out of thirty Dow declines of 10% or more, the price of gold/gold stock index declined 28 times. Of those 28 declines, gold fell by a greater percentage than the Dow Industrials in 27 instances.
Given what has been demonstrated, the lesson should be clear: gold and gold stocks cannot climb higher at the same time that the Dow Jones Industrial Average is in a declining trend. If the newsletter writers believed that gold was the place to be when the stock market declines then it stands to reason why they lost so much money. Timing wasn't the problem, instead it was the lack of understanding of the relationship between the selloff in the general stock market and a selloff in the price of gold and gold related assets.