According to mainstream financial wisdom, when the U.S. economy becomes like an airplane that runs out of fuel and starts hurtling downward, one market is supposed to be the parachute of safety: Precious Metals.
In truth, things aren’t so hunky dory. Over the past year, passengers aboard Air Wall Street have repeatedly pulled the "ripcord" -- only to find that gold chute fails to open. By and large, the reaction has been one of shock, confusion, and panic. See:
- "Gold's recent slump bewilders investors," began a recent DJ MarketWatch. "Gold prices tend to rise when the economy falls into troubles; but its recent slumps have defied conventional wisdom."
- "It's been a puzzle for most of us… In hard times, gold is a good thing to have, [but] seeing the price continue to drop has been curious." (AP)
Also note: Gold hit its all-time high on March 17, 2008, months BEFORE crude oil reached its July 11 peak AND the U.S. dollar established its late August breakout level.
Technically speaking, there's no external glitch preventing the precious metal chute from opening. The glitch is the "parachute" itself. The "correlation" between a slumping economy and soaring gold prices does NOT exit. Never did -- unless you count the Great Depression era, when the government fixed the price of bullion as all other asset classes were plunging in value.
(Gold: Not the "Deflation Hedge" You Think It Is: The November 2008 Financial Forecast Service reveals whether the flight from debt-denominated assets will re-ignite a spark for real money. Get the full story today)
It’s simple, really. If gold is a "safe haven," then its performance during the 11 officially recognized recessions since World War II should show prices soaring. In the March 14, 2008 Elliott Wave Theorist, Elliott Wave International president Bob Prechter reveals such is NOT the case -- via the following table.
Bob also plotted the Dow Jones Industrial Average into the same period and made this startling discovery: The average total return for the Dow during recessions since 1945 is 6.89%. Taking into account modern transaction costs, the Dow actually beats gold with a 6.87% return.
The most powerful myth-debunking punch of all, though, came via the second chart of gold's performance -- this time during periods of financial growth.
In Bob's own words: "All huge gains in gold have come while the economy was expanding… The idea that gold reliably rises during recessions and depressions is wrong. In fact, like most such passionately accepted lore, it's backwards."
At the end of the March 14 Elliott Wave Theorist, Bob addressed the burning question: "So, what's next for gold?" and wrote: "Today, the economic expansion is hanging on by a thread. If the relationship shown here holds true, gold should peak concurrently with the economy."
That same day, the March 14 Short Term Update presented a powerful close-up of Gold with the headline: “Waiting For A Reversal.” STU wrote: “Gold hit the psychological motherlode yesterday when it pushed to $1,000. We may have to wait until closer to the end of the week before prices make the turn lower, but any decline beneath $960 should be a clear warning that the declining phase is starting.”
What followed – an eight-month long, 30%-plus selloff to a one-year low -- speaks for itself.
Now, in the latest Elliott Wave Theorist, Bob Prechter's original message is reinforced: If you bought precious metals because you thought the economy was tanking -- you've lost. If you bought gold mining stocks because you believed industrial demand was separate from investment demand -- you've lost.