Gold Stocks and Gold Price During the Great Depression
August 1st, 2009 Filed under: Uncategorized — Economic Author
Starting in 1929, the world would witness one of the greatest economic downturns ever recorded. Originating in the United States, the Great Depression began in late October with an unprecedented stock market crash. How could a twentieth century economy nearly collapse? The Great Depression provides an example of falling markets and widespread poverty. However, one significant outlier existed in the market at the time: gold industry. Exemplified through a brief analysis of Homestake Mining, gold industry stocks experienced extraordinary gains in share price and dividend payouts.
During the 1920s, the United States experienced a remarkably bullish equity market. However, gold stocks, in general, were not participants; instead, they underwent a downward trend. Gold companies had been afflicted by a bearish market since the late 1880s. This would all change with the onset of the Great Depression. Gold stockswould prove to thrive during this global economic slowdown. Our central illustration will focus on the Homestake Mining Company, one of the world’s largest gold producers in the early twentieth century.
Homestake’s main operation was in the heartland of the United States, mining gold from the hills of South Dakota. Most gold sector historians agree that Homestake serves as a fair representation for the entire gold mining industry at the time. One must note that the U.S. government passed the Gold Standard Act in 1900 which placed the entire country on the gold standard, creating a fixed exchange rate with all other countries whose currencies were fixed to the gold price. With a fixed gold price, gold stocks fluctuated around production levels, growth rates, cash costs, and net asset value. Changes in the gold price were unable to affect the stock price when the country entered the Great Depression.
Homestake stock sold for about $65 per share in 1929. By 1933, the average stock price for Homestake was around $370. This represents a gain of more than 450% over the course of four years. The Dow Jones Industrial Average fell 89% over the three years between its 1929 peak to its 1932 bottom. Not only did stock prices increase for Homestake, but dividends also skyrocketed. In 1929, Homestake paid dividends of about $7 per share. By 1935, dividends had increased to $56, a staggering rate of 800% over six years. During these deflationary times, gold stocks not only retained their values but provided significant returns for investors.
Deflation, the underlying crisis during the Great Depression, results in heightened gold stock prices. The reason why is that deflation diluted the value of the U.S. dollar while the price of gold was fixed by the government. While some would argue that this fixed gold price ensured the rise for gold stock prices, this fallacy is simple to debunk by examining the positive effects on gold stocks after the removal of the gold standard in 1971. Even though the gold price was no longer fixed, gold stocks performed normally. Interestingly, Congress passed the Gold Reserve Act of 1934 and gave the government permanent title to all gold assets. Most importantly, it increased the gold price to $35 and further devalued the dollar. This certainly contributed to the spike in Homestake’s share price from 1934 to 1935.
Looking forward, gold stocks are very promising under the current market as deflation is likely. Should deflation enter the 2009 economic crisis, gold stocks will be set to perform at record highs. Gold prices would cross the $1000 barrier and further elevate gold company shares. The magnitude could be far greater than what was witnessed during the Great Depression when Homestake had annualized gains of more than 100%. Gold will no longer be seen as a placeholder for value, but as an investment for an uncertain future.
