During the Great Depression, at a certain point, gold stocks started a massive rally. While most things were going down in price, gold stocks made significant gains, becoming one of the best performing sectors during that time. Below is a chart from sharelynx.com, which illustrates the performance of the gold stocks during this time:
It would seem that some stocks were going up as much as 300% and more within a 1- to 2-year period. It was no coincidence that gold stocks performed as well as they did. Like all goods, gold stocks will thrive under the ideal conditions. During the Great Depression those ideal conditions, perfect for a gold stocks rally, were present.
I have done some research, to establish what those ideal conditions are. Based on my findings, it is clear that massive gold stocks rallies follow a peculiar pattern of events and conditions. The pattern of events and conditions during the Great Depression is the prime example of this.
I have also found that the conditions today are very similar to those of the Great Depression. Today, the pattern of events prior to the great gold stocks rally during the Great Depression is playing out in a similar manner. Based on my research, it is clear that a massive rally in gold stocks, like that of the Great Depression, is imminent.
During the 1920s there was a massive rally in the Dow, driven by the expansion of the money supply. This rally came to an end when the Dow peaked in 1929 (also the Dow/gold ratio), followed by a severe crash. This set off a series of events and conditions, eventually leading to the massive rally in gold stocks.
The Dow peaked in 1999 (also the Dow/gold ratio) and in 2007, with a big crash from October 2007 to March 2009. This came after a huge rally in the Dow, since at least 1987. In a similar manner this has set off a series of events and conditions that will lead to a historic rally in gold stocks.
One of the peculiarities during the time of the Great Depression was the initial underperformance of South African gold mines during the first phase of the Depression. While the price of the US goldmine: Homestake, was increasing since 1929 already, the South African gold mines were still caught in a downward trend, from about 1927 until 1932 (see chart above). When the South African gold mines finally did start rallying in 1932, they outperformed.
Today, we have a similar situation, as illustrated by the following chart (from Yahoo Finance):
The chart compares the HUI to three South African goldmines: Harmony (NYSE:HMY), DRD (DROOY) and Gold Fields (NYSE:GFI). You can see that South African gold mines have significantly underperformed since 2000, just like they did during the period of 1929 to about 1932.
This underperformance, I belief, was mainly due to the down trend in the US dollar/SA rand exchange rate. It appears that this condition is about to change, with the South African gold mines outperforming most other gold mines, just like they did from 1932 during the Great Depression.
Below is a long-term chart of the JSE Gold Index (in ZAR):
I have done some fractal analysis on the chart, by indicating two patterns that appear similar. I have indicated 5 points on both patterns to illustrate how they are similar. If the bigger (current) pattern continues in a similar manner like the smaller pattern, then we are in for huge rally. This is consistent with analysis I have done for the ZAR gold price, US dollar gold price, HUI, XAU and GDX
Disclosure: I have long positions in Harmony, DROOY and Gold Fields.