E Gold And The Banks

A lot of things are said to drive the gold market, but a good argument can be made that banking health is a major driver, if not the major driver.  I made this point about our current markets in my article “Gold, The New Anti-Commodity, And Derivatives”.  After comparing the resurgence of GLD to a few of the usual suspects that gold is supposed to respond to, and finding little or no correlation, I compared gold to the inverse of the financials, and here we do, in fact, find a pretty solid correlation going on right now :

(Click on image to enlarge)

In horseshoes, we call this a “leaner,” the next best thing to a dead ringer. Here we see that gold has been strongly correlating to the inverse of the financials. It’s the banks that gold seems to be mainly concerned with …

Over the years, there has been a very strong correlation between the big gold moves and bank health. This isn’t talked or written about very much as gold is supposed to move opposite the dollar, opposite the stock market, or as a result of interest rate changes.  But if you examine history, you find that the most massive gains in the gold miners tend to happen when very serious trouble is engulfing the banking world.

It certainly was so in the 1930s. As I pointed out in my article “A Study In Crashology”, there were a lot of moving parts in the puzzle back then.  Most people think the stock market crash in 1929 was the immediate cause of the Depression.  But this market event was just a big valuation correction of speculation in the Roaring ’20s, and just a garden variety recession was going on in the economy.  In fact, we were recovering from this recession when the real trouble started. What happened to cause something more was the involvement of the banks with Wall Street in all this reckless speculation, and the fact that many banks lost so big in the stock crash.  This giant problem led to the Glass-Steagall Act of 1934 that put up a wall between banks and investment – no mingling of depositors’ money and speculation.  More than any other factor, this banking illness induced one of the mega bull markets in gold mining.  In historical context, it looks like this:

 

Looking at the historic gold miner climb “A”:

 

Here we must use Homestake Mining as our index (since none existed back then) but other giant gold miners such as Dome Mines did a similar thing.  Please note that in the years 1924 to 1929, both the gold miners and the stock market were bulls, which isn’t supposed to happen, but it does all the time.  Also note that the huge miner move wasn’t some baseless fear contagion without a dime of fundamentals behind it. The above chart has the earnings and dividend payout yearly, and as you can see, these did a monstrous climb as well. But perhaps most noteworthy about this chart is that the horrible stock market crash of 1929 barely caused a ripple in gold mining shares.  It was the approaching bank problems that sent the miners into a much higher gear.

Another bout of serious banking problems hit during the Savings and Loan Crisis of the 1980s. Before this was over, nearly 1 out of  3 Savings and Loans went under at a horrendous bail-out cost.  Despite all the supposed protections built into the system, this speculation mess cost every tax paying American over $1000 chipped in from their own wallets.  This was during a grinding bear market in gold after the 1980 bull market peak, but the gold miners did a spectacular climb at the peak of the bank failures:

 

There was the stock market crash of October, 1987, but the gold miners got clobbered along with that, and the only other significant thing going on in that year to cause a whopping 100% gain in the XAU miner index in a gold bear market in less than a year was the severe trouble in the banking world.

At the Federal Reserve History web site, the piece “The Banking Panics of 1931-1933” blatantly said that gold responded to the banks: