Bear Markets and What they Mean for Precious Metals Investors
A bear market is defined by a sustained drop in investment instrument prices — we typically enter bear markets when a broad market index falls by 20% or more from its most recent high. Individual equities can experience bear markets as well as markets as a whole, such as the Dow Jones Industrial Average.
While 20% is the threshold, bear markets frequently go much deeper than that over time rather than all at once. Although the market occasionally experiences “relief rallies,” the overall trend is negative. Investors eventually find attractive equities and begin buying, thus ending the bear market.
Investors and analysts who display a lack of confidence are a major characteristic of bear markets. During a bear market, it is common to see investors aggressively selling, driving prices farther lower.
While investors may be pessimistic about a certain stock, this may not affect the market as a whole. When the market goes negative, practically all equities inside it begin to fall, even if they report good news and expand earnings individually.
Let’s define bear and bull markets and what they represent for precious metal investors.
What Exactly Is a Bear Market?
Bears are big, sometimes menacing and have the potential to cause significant damage if they feel threatened. In the winter, they sleep for months. They’re also terrible news for stock and index investors.
The Great Recession that lasted from 2007 to 2009? That was a protracted bear market. Consider a bear mauling its victim to the ground before devouring it. A bear market has that effect on equities and indexes.
A bear market occurs when the value of securities falls by 20% or more from recent highs. They are related to broad market declines or when the S&P 500 falls. Investors also consider individual assets or commodities that fall 20% or more for at least two months are also in a bear market.
Bear Markets:
How Long Do They Last and What Causes Them?
A bear market usually occurs just before or after the economy enters a recession, but this is not always the case. Investors closely monitor important economic indicators such as hiring, wage growth, inflation, and interest rates to determine when the economy is weakening.
When investors observe a declining economy, they expect business profits to fall in the near future. When this happens, they sell equities to avoid further loss causing the market to fall. A bear market might foretell increased unemployment and difficult economic times ahead.
Bear markets are often shorter than bull markets, lasting 363 days on average, compared to 1,742 days for bull markets. According to Invesco data, they are also less statistically severe, with average losses of 33% compared to bull market average gains of 159%.
The coronavirus bear market, which began on March 11, 2020, quickly transitioned into a bull market — while the entire economic impact is still evolving, it served as a very good lesson for investors.
What Does a Silver and Precious Metals Bear Market Mean for Investors?
Economic downturns are exactly what precious metals investors are bracing for.
In a bear market, owners tend to sell their equities when their values fall in order to avoid further losses. To balance their portfolios at this time, people will resort to gold and silver as safe investments for safety. Historically, when the market falls, the price of gold rises. This “see-saw” effect may be seen in the rise in gold prices after the 2008 subprime mortgage crisis when the economy was in deep recession.
Even if equities and indices are in a bear market, gold and silver may see an increase in value, bringing us to (you guessed it!) a bull market.
Bottom Line:
Although the stock market has made a decent recovery since 2020, investors’ trust has not fully restored, and uncertainty still looms. These factors spurred future gold and silver rallies, while the stock market recovered slowly (compared to gold’s performance). This market behaviour demonstrates the importance of understanding the characteristics of bear markets for gold and silver investors, as metals behave differently than equities.
Sources:
https://www.invesco.com/content/dam/invesco/emea/en/pdf/T_con_zero-bear_necessities_apr_2020.pdf
https://www.investopedia.com/a-history-of-bear-markets-4582652