What Happens to Gold and Silver When the Stock Market Crashes?

Jeff Clark, Senior Precious Metals Analyst, GoldSilver

(Updated: March 3, 2017) 

Many investors hold gold and silver to hedge against various crises. But does this hedge hold up during stock market crashes?

It’s a common assumption that gold and silver prices will fall right along with the market. And if that’s the case, wouldn’t it be better to wait to buy them until after the dust settles?

Before formulating a strategy, let’s first look at price data from past stock market crashes…

The Message from History

I looked at past stock market crashes and measured gold and silver’s performance during each of them to see if there are any historical tendencies.

The following table shows the eight biggest declines in the S&P 500 over the past 40 years, and how gold and silver prices responded to each.

[Green signifies it rose when the S&P crashed; red means it fell more than the S&P; and yellow denotes it fell but less than or the same as the S&P.]

What Happens to Gold And Silver During Stock Market Crashes

There are some reasonable conclusions we can draw from this historical data.

1. In most cases, the gold price rose during the biggest stock market crashes.

Notice this was regardless of whether the crash was short-lived or stretched over a couple years. Gold even climbed in the biggest crash of them all, the 56% decline that lasted two full years in the early 2000s. It seems clear that we should not assume gold will fall in a stock market crash—just the opposite has occurred more often.

You’ll recall that gold did fall in the initial shock of the 2008 financial crisis. This is perhaps why many investors think gold will drop when the stock market does. But while the S&P continued to decline, gold rebounded and ended the year up 5.5%. Over the total 18-month stock market selloff, gold rose over 25%.

The lesson here is that even if gold initially declines during a stock market collapse, one should not assume it’s down for the count. In fact, history says it might be a great buying opportunity.

2. Gold’s only significant selloff (-46% in the early 1980s) occurred just after its biggest bull market in modern history.

Gold rose over 2,300% from its 1970 low to the 1980 peak. So it isn’t terribly surprising that it fell with the broader stock market at that point.

We have the opposite situation today. Gold has just exited one of its worst bear markets in modern history—a 45% decline from its 2011 peak to its 2016 low.

3. Silver did not fare so well during stock market crashes.

In fact, it rose in only one of the S&P selloffs (and was basically flat in another one).

This is likely due to silver’s high industrial use (about 56% of total supply), and that stock market selloffs are usually associated with a poor or deteriorating economy.

However, you’ll see that silver fell less than the S&P in all but one crash. This is significant, because silver’s high volatility would normally cause it to fall more.

Also notice that silver’s biggest rise (+15% in the 1970s) took place amidst its biggest bull market in history. It also ended flat by the end of the financial crisis in early 2009, which was its second biggest bull market. In other words, we have historical precedence that silver could do well in a stock market crash if it is already in a bull market. Otherwise it could struggle.

The overall message from history is this:

• Odds are high that gold won’t fall during a stock market crash. Silver might depend on whether it’s in a bull market.

So, why does gold behave this way?

Gold’s Yin to the Stock Market’s Yang

The reason gold tends to be resilient during stock market crashes is because they are negatively correlated. In other words, when one goes up, the other tends to go down.

This makes sense when you think about it: stocks benefit from economic growth and stability; gold benefits from economic distress and crisis. If the stock market falls, fear is usually high, and investors typically seek out the safe haven of gold. If stocks are rocking and rolling, the perceived need for gold from mainstream investors is low.

Here’s the historical data. This chart shows the correlation of gold to other common asset classes. The zero line means gold does the opposite of that investment half of the time. If it’s below zero gold moves in the opposite direction of that investment more often than with it (and vice versa if above zero).

Stocks Have a Negative Correlation to Gold

You can see that on average, when the stock market crashes, gold has historically risen more than declined.

Gold has also historically outperformed the cash sitting in your bank account or money market fund. Even real estate values follow gold only a little more than half the time.

This is practical information for investors:

• If you want an asset that will rise when most other assets fall, gold is likely to do that more often than not.

This doesn’t mean gold will automatically rise with every downtick in the stock market. In the biggest crashes, though, history says gold is more likely to be sought as a safe haven.

So, if you think the economy is likely to be robust, you may want to own less gold than usual. If you think the economy is headed for weakness, then you may want more gold than usual. And if you think the economy is headed for a period of upheaval, you may want to own a lot.

There’s one more possibility we have to consider…

What if the Stock Market Doesn’t Crash?

It’s not always easy to predict if stocks will fall off a cliff, so what if they don’t? Or what if the market is just flat for a long period of time?

You might think that’s unlikely, given the number of risks inherent in our economic, financial, and monetary systems today. But look at the 1970s—it had three recessions, an oil embargo, interest rates that hit 20%, and the Soviet invasion of Afghanistan. Here’s how the S&P performed, along with gold.

Gold Rose 2,328% Trough to Peak, While the S&P 500 Was Flat

The S&P basically went nowhere during the entire decade of the 1970s. After 10 years it was up a measly 14.3% (excluding dividends).

Gold, on the other hand, posted an incredible return. It rose from $35 per ounce to its January 1980 peak of $850, a whopping 2,328%.

In other words, gold’s biggest bull market in modern history occurred while the stock market was essentially flat. That’s because the catalysts for higher gold were unrelated to the stock market—they were more about the economic and inflationary issues occurring at the time. We have to allow for the possibility that this happens again: citizens are drawn to gold for reasons unrelated to the performance of the S&P.

The Investor’s Best Strategy

Anything can happen when markets are hit with extraordinary volatility. But regardless of what stocks might do, is it wise to be without a meaningful amount of physical gold and silver in light of all the risks we face today? I don’t think so.

Perhaps the ideal solution is to have a stash of cash ready to deploy if we get another big decline in precious metals—but also have a stash of bullion already set aside in case the next crisis sends gold off to the races.