A bear market refers to a decline in prices, usually for an extended period, in a single security or asset, group of securities or the securities market as a whole. Its opposite is a bull market where prices are rising. In case of precious metals, the great gold bear market started in 1980 after the major, long-term top.
Eric, Jill and John are spending a pleasant morning in a zoo. The sight of a bear reminds Eric of something…
A situation in which prices on a market are declining for a considerably long time usually in a severe manner and after a price bubble has burst. From a precious metals investor’s point of view, a bear market in stocks does not necessarily imply a bear market for gold or silver as investors tend to sell stocks and shift their attention to gold and silver as safe haven. The opposite of a bear market is a bull market when prices go up.
Short-term and long-term investors
A bear market might be perceived differently by short-term investors and long-term investors. While in the short-term declining prices cause one’s profits to evaporate, the situation in the long-term is more complicated. As the market will most likely rebound after the slump, long-term investors might see a bear market as an opportunity to buy assets at significantly lower prices. However, one must be careful when adopting such a strategy – severe declines may last for years and in such situations even long-term investors can suffer losses.
The fact that a bear market is usually a transitional state does not mean that you cannot profit during the slump. There is a possibility to open a short position which would give you profit in case prices decline. As the prices typically fall during the bear market, short positions might generate profits. On the other hand, one must remember that the bear market usually does not last forever – if the trend rebounds, short positions might cause significant losses.
Different time spans
As we have mentioned, bear markets can be perceived differently by short-term and long term investors. There is more to it. A long-term bear market does not necessarily imply a bear market in the short term. And vice versa, a short term bear market does not directly indicate a long-term bear market. As a matter of fact, in different time spans there may be simultaneous bear and bull markets for the same asset.
However, it needs to be emphasized that it is the fundamentals that decide of the direction of the trend in the long-term. So a secular (long-term) bear or bull market is defined by fundamentals. A transition from a secular bull market to a secular bear market stems from a change in the fundamental situation on a particular market; even a powerful technical pattern is not enough to do it.
Stocks and precious metals
As mentioned previously, during a typical stock bear market, prices of gold and silver do not necessarily follow the decline. What is more, metals often tend to appreciate during such periods. This will be best described on an example.
The 2008’s international financial crisis, which evolved into the global economic crisis, proved to be the start of one of the biggest economic depressions in history. On the below chart you will find the S&P 500 quotes since 2008 (chart courtesy of).
The crash began in October 2008 and the bear market lasted until March 2009. It took S&P 500 nearly two years to reach the level from before the start of the crisis. The bear market was relatively long and severe on the stock market.
How about the precious metals market? Let’s take a look at the next chart.
At first, prices of gold seemed to follow the decline in the general stock market in October. However, the bottom had been reached already in November and afterwards the prices started to rise. It took gold only three months to recover to the level from before the onset of the crisis. This was because investors who had sold their assets after the crush were looking for safe investments and chose gold. It also explains why the upward trend of prices of gold was weakened around March 2009. At this point the S&P 500 started to recover (take a look at the previous chart) and investors started to move their capital to the stock market once again.
Although the stock market rebounded, it did not regain the trust of investors and uncertainty remained considerably high. These factors fueled further rallies in gold and brought its price to the level almost twice as high as in November 2008, while the stock market slowly (when compared to the performance of gold) recovered. This shows that the knowledge of the traits of bear markets is essential to precious metals investors as metals behave differently than stocks do.
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