Should Gold Bulls Worry About A Market Crash?

I’ve been in this sector long enough to know this fear isn’t anything new.

Various and different characters, most of whom have a dubious track record, have been pushing this narrative as far back as the early 2000s. 

This view is that the stock market will crash, which will cause a crash in Gold and gold stocks, and only after that happens can Gold and gold stocks go to the moon.

Those purporting this view maintain a religious conviction despite any new evidence that disproves it. 

The only time this fear was justified was in 2007 and perhaps right before the Covid crash, which was a Black Swan event and reversed course completely within weeks. 

The market did crash in 2008, and Gold and gold stocks did as well. The crash narrative was dead-on due to the understanding of the mortgage and housing markets’ problems, which would spread.   

Before we assess the current situation, we should point out that every crash and bear market is different and that crash declines are rather infrequent. 

If a crash or bear market lies in our immediate future, one historical template could be the 1987-1990 period.

Much like in 2020, the stock market crashed in 1987 but recovered quickly, albeit nowhere as fast as in 2020. However, there wasn’t a recession in 1987. That, and a mild bear market followed three years after the crash.

A significant crash or bear market (on the scale of 1929, 1937, and 2007) requires a preceding economic expansion, Fed tightening, and issues in the banking system. 

That is not the case today as the Fed remains accommodative, and the banks were recapitalized after the last crisis. Moreover, household balance sheets are in a much better position than in 2007, and the explosion in debt is on the government side and non-financial corporate side.

Today, there is a speculative bubble concentrated in the technology sector, and speculation due to cheap money and the democratization of finance has bled into other areas like crypto. Also, valuations are off the charts, and therefore expected returns are extremely low.  

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