Gold And The Most Recent Recession

The very respectable John Hussman now is now expecting a recession. John Hussman is a Phd economist and successful mutual fund manager who uses hedging extensively to minimize risk. He is the opposite of a perma-bear doom and gloomer. Here's what he says (emphasis added by me; click here for the full essay that includes the really cool graph):
"Two weeks ago, for the first time since the 2001-2002 downturn, our measures again signaled an oncoming U.S. recession. This signal is based on four general conditions. They are all well-known to be related to economic weakness (not the result of spurious data-mining), but they do not have great usefulness individually. They become powerful when they are unanimous – these conditions have always occurred together during or just prior to recessions, and they have only occurred together during or just prior to recessions."

How should one handle a probable recession? I've decided, for the time being at least, to move my portfolio mostly into precious metal mining stocks and to maintain position sizes where I can change course if that appears prudent. I have now completed my transition to precious metals and have unloaded almost all of my base metal stocks including Capstone (CS.TO) and Roca Mining (ROK.V) which I have fairly recently touted. My change of viewpoint on the outlook for a recession together with the expected impact of a recession on base metal stocks trumps, in my view, the outstanding qualities of these and other other base metal mining stocks that I have been discussing in this blog.

Why precious metal mining stocks?

Part of the answer is in the above graph.

1. Last time we had a recession stocks (as represented by the S&P 500) got hammered. The S&P fell from roughly 1500 to 800 (a roughly 46% drop).
2. During the same period of time, both the price of gold itself and the gold mining stocks were less volatile rising roughly 20%.
3. Most importantly, the gold and gold stock performance was uncorrelated to the stock market plunge.

Now, this time gold and precious metal stocks are starting from a precariously higher place than when the previous recession began. They may not behave the same way they did with the previous recession. There are good reasons to think they will continue to rise, but I'll save that for another post. At least gold and gold stock behavior is not correlated to the general stock market which most likely will be hammered should a recession take place.

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