Note the similarities in price action within the highlighted areas at the levels plotted... now, let's see what happened at those times and what similarities we can find in the fundamentals.
The Great Crash of ‘79
The Dow Jones Industrial index peaked at $897 on Friday October 5th, 1979. On Saturday the Federal Reserve and Chairman Paul Volcker adopted new policy procedures that would target non-borrowed reserves rather than targeting the price of reserves in the financial system. This was intended to be a better approach to controlling inflation. Note that Monday was Columbus Day and Banks were closed, the market still fell 13.6 points which by today’s standards is nothing, but back then that would have been a 1.65% drop with banks and institutions not even trading. The Dow continued to fall for the remainder of the week for a total loss of 6.53%. As if that wasn't bad enough, after a slight recovery from November 1979 - February 1980, it finally bottomed out hitting a low at $730 on March 27th, 1980 for a loss of 18.68%.
What happened to Gold?
For a few months gold prices stayed flat but began to rise on November 27th until they reached their peak on January 21st, 1980. Price per troy ounce went from $396 to $873, for a gain of 122.14% in 108 days.
The Dotcom Bubble
The Dotcom Bubble was an era where investors ignored fundamentals, basing their investments on PE ratios on future earnings, in many cases several years ahead when many of these companies had little or no current revenue. During this time, PE ratios were averaging over 44 times earnings. In 1995, the Nasdaq began the year at a price of $404. The bubble lasted a total of 5 years finally hitting its peak on March 24th, 2000 at $4816. However, speculation and overconfidence increased rapidly in the final year causing the index to rise from a price of $1836 on the opening day in January 1999 for a total gain of 162.33% in just over a year. The burst of the Dotcom Bubble lasted 2.5 years with the Nasdaq falling 505.64% until it reached its bottom on October 8th, 2002 at a price of $795. After everything was said and done only roughly 48% of Dotcom companies survived the ordeal.
What the Fed did with Interest Rates...
On March 3rd, 2001 the fed conducted its first rate cut of many, dropping rates 50 basis points from 6.50% to 6.00%. These cuts continued until April 26th, 2003 reaching only 1.00%.
What Happened to Gold?
On March 24th, 2000 gold opened at a price of $285. It continued down for nearly a full year losing 10.68% hitting a bottom at $255 before finally taking off and continuing to rally nearly until the Housing Bubble in 2008, reaching a peak on March 17th, 2008 at a price of $1033 a troy ounce. Gold rallied for a total gain of 305.29% over the course of 7 years for an average gain of roughly 43% per year.
Housing Bubble
After the Dotcom Bubble, mortgage rates began a steady decline due to government encouragement of broad homeownership. Banks were also lowering their lending requirements providing subprime mortgages to unqualified buyers. They were using adjustable-rate mortgages that provided very low rates for 2 - 3 years and then resetting at higher rates. House prices on average increased by 55% from 2000 - 2007. Now with prices so high, risk premiums were just not worth the investment. This caused a massive sell-off in the securities market as investors began to dump their mortgage-backed securities at alarming rates.
Now let's talk numbers....
At the height of the Housing Bubble, The Nasdaq index traded at $2239 and fell 54.50% down to $1018 before recovering. The S&P 500 was trading at $1576 and fell 57.69% down to $666. On April 1st, 2001, a few days after the beginning of the crash, the S&P 500 was trading at a PE ratio of 33.96, reaching a high of 46.10 in December. The Dow Jones Industrial Average traded at a high of $14198 before falling 54.53% to a low of $6470.
Another factor to note during the Housing Bubble was the inversion of the yield curve that occurred on Jan 3rd, 2006 which many economists would signal as a potential recession in the near future. This inversion lasted 17 months. The yield curve reverted back on May 29th, 2007, 16 months later was September 29th when the market began to crash.
During this time The Fed ramped up its quantitative easing efforts and increased their balance sheet from September through to December 2008 by 1.3 trillion dollars, a 143% increase.
What Happened to Interest Rates?
By 2006 fed interest rates were beginning to tick up from 1.00% to 5.25% on April 26th, 2007 before The Fed began making consecutive cuts starting on September 18th, 2007 all the way down to 25 basis points on December 16th, 2008.
What Happened to Gold?
With Gold already catching bids due to the Dotcom Bubble only 8 years earlier. Before the Housing Bubble took place, it only fell 34.13% from its highs to $681 an ounce. From that point we saw gold rally 182.48% to $1923 an ounce in just under 3 years reaching its highs on September 5th, 2011. Adding this to the Dotcom Bubble, gold had rallied 574.75% in 11 and half years.
THE EVERYTHING BUBBLE
Now let’s take a look at what the current market conditions are telling us.
Equities Market
Gains since the Housing Bubble
Nasdaq – 1211.90%
S&P 500 – 479.11%
Dow Jones Industrial Average – 383.35%
PE Ratios
Nasdaq – 41.10
S&P 500 – 41.74
Dow Jones Industrial Average – 29.53
One thing to note this time around is the massive number of speculative bets in small cap stocks. Looking at the Russell 2000, the projected 12-month PE ratio is estimated to be 75.63.
The cause of these high PE ratios is strikingly similar to the Dotcom Bubble as speculators are willingly investing money into these “stonks” and many, many companies that are being heavily overvalued despite the fact they are not showing any profits or revenue but are still showing an increase in stock prices. Another factor that is cause for concern is the increase in SPAC (special purpose acquisition company) IPOs that happened in 2020. Out of the 480 IPOs issued in 2020, (already a 106% increase from the amount issued in 2019 of 233) 165 of those were SPACs, again doubling the amount issued. In 2007 SPACs accounted for only 14% of the IPOs issued verses the 35% issued in 2020. Out of the $154 billion, $82.1 billion of that was raised through SPACs. This is concerning as SPACs have not performed very well over the years, showing an average return of -1.4% since 2015.
Interest Rates
We see similarities between interest rates as well. As with both the Dotcom Bubble and the Housing Bubble, rates before the crash were on the rise and then The Fed had to step in, to lower rates as the market was crashing. After the Housing Bubble, rates were steady at 25 basis points from December 2008 through to December 2015. The Fed began raising rates to their peak of 250 basis points until beginning their cuts on July 31st, 2019 and have since been lowered back to 0.25% on March 15th, 2020 in the height of the Coronavirus Pandemic.
Housing Market
We are seeing similarities in the housing market to that of the Housing Bubble with rates being at their lowest in history sitting at just 2.68% in December 2020. What’s interesting is that this is causing a lot of individuals to refinance their homes, existing home sales have been steadily on the rise since 2010 however, we recently seen it spike past the average incline in August 2020. New home sales have seen the same reaction with a spike past the average incline in July 2020 through to present data. According to Freddie Mac, average home prices are the highest in history with an average price of $324,900 on October 26th, 2020. That is a 55.90% increase since the lows during the Housing Bubble.
Quantitative Easing
With the Fed increasing their balance sheet at an alarming rate, this adds an additional factor we need to be worried about. As previously mentioned in 2008 we saw an additional 1.3 trillion added, this time around with the coronavirus pandemic the fed has added an outrageous 3.1 trillion dollars to their balance sheet (and this is before the most recent 1.9 trillion stimulus package Biden has proposed.
Yield Curve
Again, in August 2019 we saw the yield curve invert which was just 2 months after gold broke out from the 1350 level it respected from June 2013. Since then we have seen the yield curve revert back and the spread has grown but this is still cause for concern as possibly the only reason it has reverted back in the actions taken at the Fed level to try stimulate the economy.
How Will Gold React?
Based on the fundamental data collected, there are many reasons to see another large rally in gold prices over the coming years. Based on the technicals, we can see major similarities in price action dating back to the crash in 1979 with highs spiking through the $700 level, retracing back until the Dotcom Bubble. Price consolidated below the highs we saw in 1979 until breaking through prior to the actual market crash during the Housing Bubble. Price retraced back to that $700 level just as the market crashed sending prices soaring spiking through the $1750 level briefly before retracing back to the highs of the Dotcom Bubble around $1000 an ounce and staying suppressed below $1350 until finally breaking in late 2019 sending prices soaring through the highs of the Housing Bubble. Now just as we saw before, prices have nearly retraced back to the previous highs during a time when fundamentals are screaming for help.
Now, this is purely speculation based on the data collected so don’t just take my word on it, but if history is any indication of the future, we could potentially see a rally up to the $3000 level in the coming years. Just note that throughout these 3 crashes mentioned, Gold either stayed flat or lost value for a few months after the initial crash in the equities markets. At this point the bias is still neutral as we have not got a proper signal to begin scaling in to long positions.
All the data described in this post was found using manually using Tradingview charts, some data through www.macrotrends.net and finally www.federalreserve.gov
History does not guarantee future results and must be respected as such. Trade and invest with caution. Do your own research and make your own decision when investing your money.
The Great Crash of ‘79
The Dow Jones Industrial index peaked at $897 on Friday October 5th, 1979. On Saturday the Federal Reserve and Chairman Paul Volcker adopted new policy procedures that would target non-borrowed reserves rather than targeting the price of reserves in the financial system. This was intended to be a better approach to controlling inflation. Note that Monday was Columbus Day and Banks were closed, the market still fell 13.6 points which by today’s standards is nothing, but back then that would have been a 1.65% drop with banks and institutions not even trading. The Dow continued to fall for the remainder of the week for a total loss of 6.53%. As if that wasn't bad enough, after a slight recovery from November 1979 - February 1980, it finally bottomed out hitting a low at $730 on March 27th, 1980 for a loss of 18.68%.
What happened to Gold?
For a few months gold prices stayed flat but began to rise on November 27th until they reached their peak on January 21st, 1980. Price per troy ounce went from $396 to $873, for a gain of 122.14% in 108 days.
The Dotcom Bubble
The Dotcom Bubble was an era where investors ignored fundamentals, basing their investments on PE ratios on future earnings, in many cases several years ahead when many of these companies had little or no current revenue. During this time, PE ratios were averaging over 44 times earnings. In 1995, the Nasdaq began the year at a price of $404. The bubble lasted a total of 5 years finally hitting its peak on March 24th, 2000 at $4816. However, speculation and overconfidence increased rapidly in the final year causing the index to rise from a price of $1836 on the opening day in January 1999 for a total gain of 162.33% in just over a year. The burst of the Dotcom Bubble lasted 2.5 years with the Nasdaq falling 505.64% until it reached its bottom on October 8th, 2002 at a price of $795. After everything was said and done only roughly 48% of Dotcom companies survived the ordeal.
What the Fed did with Interest Rates...
On March 3rd, 2001 the fed conducted its first rate cut of many, dropping rates 50 basis points from 6.50% to 6.00%. These cuts continued until April 26th, 2003 reaching only 1.00%.
What Happened to Gold?
On March 24th, 2000 gold opened at a price of $285. It continued down for nearly a full year losing 10.68% hitting a bottom at $255 before finally taking off and continuing to rally nearly until the Housing Bubble in 2008, reaching a peak on March 17th, 2008 at a price of $1033 a troy ounce. Gold rallied for a total gain of 305.29% over the course of 7 years for an average gain of roughly 43% per year.
Housing Bubble
After the Dotcom Bubble, mortgage rates began a steady decline due to government encouragement of broad homeownership. Banks were also lowering their lending requirements providing subprime mortgages to unqualified buyers. They were using adjustable-rate mortgages that provided very low rates for 2 - 3 years and then resetting at higher rates. House prices on average increased by 55% from 2000 - 2007. Now with prices so high, risk premiums were just not worth the investment. This caused a massive sell-off in the securities market as investors began to dump their mortgage-backed securities at alarming rates.
Now let's talk numbers....
At the height of the Housing Bubble, The Nasdaq index traded at $2239 and fell 54.50% down to $1018 before recovering. The S&P 500 was trading at $1576 and fell 57.69% down to $666. On April 1st, 2001, a few days after the beginning of the crash, the S&P 500 was trading at a PE ratio of 33.96, reaching a high of 46.10 in December. The Dow Jones Industrial Average traded at a high of $14198 before falling 54.53% to a low of $6470.
Another factor to note during the Housing Bubble was the inversion of the yield curve that occurred on Jan 3rd, 2006 which many economists would signal as a potential recession in the near future. This inversion lasted 17 months. The yield curve reverted back on May 29th, 2007, 16 months later was September 29th when the market began to crash.
During this time The Fed ramped up its quantitative easing efforts and increased their balance sheet from September through to December 2008 by 1.3 trillion dollars, a 143% increase.
What Happened to Interest Rates?
By 2006 fed interest rates were beginning to tick up from 1.00% to 5.25% on April 26th, 2007 before The Fed began making consecutive cuts starting on September 18th, 2007 all the way down to 25 basis points on December 16th, 2008.
What Happened to Gold?
With Gold already catching bids due to the Dotcom Bubble only 8 years earlier. Before the Housing Bubble took place, it only fell 34.13% from its highs to $681 an ounce. From that point we saw gold rally 182.48% to $1923 an ounce in just under 3 years reaching its highs on September 5th, 2011. Adding this to the Dotcom Bubble, gold had rallied 574.75% in 11 and half years.
THE EVERYTHING BUBBLE
Now let’s take a look at what the current market conditions are telling us.
Equities Market
Gains since the Housing Bubble
Nasdaq – 1211.90%
S&P 500 – 479.11%
Dow Jones Industrial Average – 383.35%
PE Ratios
Nasdaq – 41.10
S&P 500 – 41.74
Dow Jones Industrial Average – 29.53
One thing to note this time around is the massive number of speculative bets in small cap stocks. Looking at the Russell 2000, the projected 12-month PE ratio is estimated to be 75.63.
The cause of these high PE ratios is strikingly similar to the Dotcom Bubble as speculators are willingly investing money into these “stonks” and many, many companies that are being heavily overvalued despite the fact they are not showing any profits or revenue but are still showing an increase in stock prices. Another factor that is cause for concern is the increase in SPAC (special purpose acquisition company) IPOs that happened in 2020. Out of the 480 IPOs issued in 2020, (already a 106% increase from the amount issued in 2019 of 233) 165 of those were SPACs, again doubling the amount issued. In 2007 SPACs accounted for only 14% of the IPOs issued verses the 35% issued in 2020. Out of the $154 billion, $82.1 billion of that was raised through SPACs. This is concerning as SPACs have not performed very well over the years, showing an average return of -1.4% since 2015.
Interest Rates
We see similarities between interest rates as well. As with both the Dotcom Bubble and the Housing Bubble, rates before the crash were on the rise and then The Fed had to step in, to lower rates as the market was crashing. After the Housing Bubble, rates were steady at 25 basis points from December 2008 through to December 2015. The Fed began raising rates to their peak of 250 basis points until beginning their cuts on July 31st, 2019 and have since been lowered back to 0.25% on March 15th, 2020 in the height of the Coronavirus Pandemic.
Housing Market
We are seeing similarities in the housing market to that of the Housing Bubble with rates being at their lowest in history sitting at just 2.68% in December 2020. What’s interesting is that this is causing a lot of individuals to refinance their homes, existing home sales have been steadily on the rise since 2010 however, we recently seen it spike past the average incline in August 2020. New home sales have seen the same reaction with a spike past the average incline in July 2020 through to present data. According to Freddie Mac, average home prices are the highest in history with an average price of $324,900 on October 26th, 2020. That is a 55.90% increase since the lows during the Housing Bubble.
Quantitative Easing
With the Fed increasing their balance sheet at an alarming rate, this adds an additional factor we need to be worried about. As previously mentioned in 2008 we saw an additional 1.3 trillion added, this time around with the coronavirus pandemic the fed has added an outrageous 3.1 trillion dollars to their balance sheet (and this is before the most recent 1.9 trillion stimulus package Biden has proposed.
Yield Curve
Again, in August 2019 we saw the yield curve invert which was just 2 months after gold broke out from the 1350 level it respected from June 2013. Since then we have seen the yield curve revert back and the spread has grown but this is still cause for concern as possibly the only reason it has reverted back in the actions taken at the Fed level to try stimulate the economy.
How Will Gold React?
Based on the fundamental data collected, there are many reasons to see another large rally in gold prices over the coming years. Based on the technicals, we can see major similarities in price action dating back to the crash in 1979 with highs spiking through the $700 level, retracing back until the Dotcom Bubble. Price consolidated below the highs we saw in 1979 until breaking through prior to the actual market crash during the Housing Bubble. Price retraced back to that $700 level just as the market crashed sending prices soaring spiking through the $1750 level briefly before retracing back to the highs of the Dotcom Bubble around $1000 an ounce and staying suppressed below $1350 until finally breaking in late 2019 sending prices soaring through the highs of the Housing Bubble. Now just as we saw before, prices have nearly retraced back to the previous highs during a time when fundamentals are screaming for help.
Now, this is purely speculation based on the data collected so don’t just take my word on it, but if history is any indication of the future, we could potentially see a rally up to the $3000 level in the coming years. Just note that throughout these 3 crashes mentioned, Gold either stayed flat or lost value for a few months after the initial crash in the equities markets. At this point the bias is still neutral as we have not got a proper signal to begin scaling in to long positions.
All the data described in this post was found using manually using Tradingview charts, some data through www.macrotrends.net and finally www.federalreserve.gov
History does not guarantee future results and must be respected as such. Trade and invest with caution. Do your own research and make your own decision when investing your money.
