It has been a while since we’ve applied historical analysis to the precious metals sector. It is something we really enjoy as history can help define and contextualize current trends and help us spot opportunities. Back in March of this year we noted that the gold stocks could be following the path of recovery of housing stocks since their 2009 bottom. Recently, James Flanagan of Gann Global Financial has produced some excellent videos discussing some historical comparisons that are quite relevant to the gold stocks at present. We saw his videos, remembered our housing analog and wanted to take it a step further. What was the path of recovery of markets following mega bear markets?
We define a mega bear market as at least an 80% decline that lasted roughly three to four years. The image below highlights the data we’ve compiled. Some of the bears are only two years long but they follow the general recovery path. That consists of a very strong initial rebound that lasts six to twelve months which is followed by a correction and consolidation which usually lasts 18 months to two years. Then, the market begins its next impulsive advance.
Next we will look at the three best fits to the gold stocks at present.
The housing stocks may be the best analog. They lost 81% during a bear market which lasted nearly four years. Then they recovered 137% before correcting 42% over 18 months. Over the next 18 months (from the 2011 low to 2013), the housing stocks gained 177%.
The S&P 500 during the Great Depression is also a good fit. The market lost 86% over nearly three years. That led to a 177% rebound which was followed by a 34% correction over one year and eight months. The market then rebounded 132% over the next two years.
Finally, Thailand is an interesting example. It lost 87% over a greater than four year bear market. Both time and price were similar to the bear market in gold stocks. After rebounding 142%, Thai stocks lost 54% over the next year and four months. While that low in late 2000 marked the corrective low in price, the market did not begin an impulsive advance for another year. However, it was worth the wait as the market gained 200% over the following two years.
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