Silver Falls When Economy Contracts

Gold and Silver: “Perfect Hedges” Against a Recession? Hardly.

Gold and Silver: “Perfect Hedges” Against a Recession? Hardly.

Get an eye-opening insight into the timing of four separate silver crashes

By Elliott Wave International

No one likes them, and financial authorities do everything they can to avoid them…

…but economic recessions do happen, nonetheless.

The official definition of a recession is a period of economic decline marked by a fall in GDP in two successive quarters.

So, how should investors protect themselves in such a scenario?

Well, as you may know, many investors believe precious metals are the perfect hedge against an economic downturn. They believe that, unlike stocks, gold and silver either maintain their value or go up in price during a recession or even a depression.

But you might be surprised to learn what the historical evidence says about this widely held belief.

Let’s start with gold. Our Elliott Wave Theorist has been sharing market observations with subscribers since 1979. Once, it noted:

The first thing to point out is that gold did not make a nickel of U.S. money for anyone in any of the recessions and depressions from 1792, when the gold-based dollar was adopted, through 1969, a period of 177 years…

In 1970, things changed dramatically. Investors lost interest in stocks and preferred owning gold instead, for a period of ten years. The same change occurred again in 2001 … but recession had nothing to do with either of these periods of explosive price gain in the precious metals.

During the 1970s, and following 2001, gold’s biggest price gains came as the economy was expanding, not shrinking. Why? Because when the economy grows, liquidity becomes available and must go somewhere — and it goes into everything, from stocks to real estate, including investments like gold.

The same is true of silver prices during economic expansions. Our November 2011 Elliott Wave Theorist showed this chart and said:


Silver has an even more pronounced relationship to economic cycles than gold does. The chart shows the history of silver prices and economic conditions going back 40 years. … Notice that all of silver’s strong price gains came during economic expansions. Then observe that all seven recessions since 1970 have coincided with falling silver prices. Finally, note that all four crashes in silver–those of 1973, 1980, 1982 and 2008–came during recessions.

Bottom line: It’s a myth that gold and silver are ideal hedges against economic downturns.

Another pervasive Wall Street myth is that the markets are random, and therefore unpredictable. From observing market behavior for almost 40 years — and not just the U.S. markets, but global trends, as well — we can tell you from experience that all liquid markets, including precious metals, are, in fact patterned. Their prices follow the Elliott wave model.

Here at Elliott Wave International, we help traders and investors see what’s really driving financial markets. To learn more, please continue reading below.

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This article was syndicated by Elliott Wave International and was originally published under the headline Gold and Silver: “Perfect Hedges” Against a Recession? Hardly.. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

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Elliott Wave International

Founded in 1979 by Robert R. Prechter Jr., Elliott Wave International (EWI) is the world's largest market forecasting firm. Its staff of full-time analysts provides 24-hour-a-day market analysis to institutional and private investors around the world. Deflation Market is a proud, long-time, subscription member to Elliot Wave International's services including Elliott Wave Financial Forecast, Elliott Wave Financial Forecast -Short Term Update, Elliott Wave Theorist, Global Market Perspective, Asian-Pacific Financial Forecast, and European Financial Forecast. Deflation Market maintains an affiliate relationship with EWI.