Gold reserves and the value of gold during the Great Depression

Beginning in 1929, the world would witness one of the greatest economic depressions ever recorded. The Great Depression that began in the United States began in late October with an unprecedented stock market crash. How could the economy of the twentieth century almost collapse? The Great Depression is an example of falling markets and widespread poverty. However, there was one significant outlier in the market at the time: the gold mining industry. As an example of a brief analysis of Homestake Mining, shares of the gold and foreign exchange industry have experienced extraordinary growth in share price and dividend payments.

During the 1920s, the United States saw an extraordinary boom in the stock market. However, gold stocks, in general, were not participants; instead, they experienced a downward trend. Gold companies have been hit by bear markets since the late 1880s. Everything would change with the onset of the Great Depression. Gold stocks will prove to be prosperous during this global economic downturn. 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 business was in the heartland of the United States, mining for gold in the hills of South Dakota. Most historians of the gold sector agree that Homestake serves as a fair representation of the entire gold mining industry at the time. It should be noted that the US 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 pegged to the price of gold. At a fixed gold price, gold stocks fluctuated around production levels, growth rates, cash costs, and net asset value. Changes in the price of gold failed to affect the value of stocks as the country entered the Great Depression.

Homestake stock was selling for about $65 per share in 1929. By 1933, the average price of Homestake stock was about $370. This represents an increase of more than 450% in four years. The Dow Jones Industrial Average fell 89% in the three years between its peak in 1929 and its trough in 1932. Not only did Homestake’s stock price rise, but its dividend also skyrocketed. In 1929, Homestake paid a dividend of about $7 per share. By 1935, the dividend had increased to $56, a staggering 800% rate in six years. In these times of deflation, gold stocks have not only held their value, but have also brought significant returns to investors.

Deflation, a major crisis during the Great Depression, causes gold prices to rise. The reason is that deflation lowered the value of the US dollar while the price of gold was fixed by the government. Although some have argued that this fixed gold price allowed gold prices to rise, this fallacy is easily debunked by examining the positive effect on gold stocks after the gold standard was abandoned in 1971. Despite the fact that the price of gold was no longer fixed, gold reserves are performing well. Interestingly, Congress passed the Gold Reserve Act of 1934 and gave the government permanent ownership of all gold assets. Most importantly, it pushed the price of gold up to $35 and further devalued the dollar. This certainly contributed to the surge in Homestake’s stock price from 1934 to 1935.

Looking ahead, gold stocks are very promising in the current market as deflation is likely. When deflation enters the economic crisis of 2009, gold stocks will be running at record highs. Gold prices would break the $1,000 barrier and further boost gold company stocks. The magnitude could be much larger than what was seen during the Great Depression, when Homestake had annual returns of more than 100%. Gold will no longer be seen as a placeholder of value, but as an investment in an uncertain future.

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