GOLD SILVER > WHAT HAPPENED
Why Gold Price Really Crashed and What You Can Do About It
Keith Fitz-Gerald writes: The news is great at telling us what's happening. But knowing what's happening is a lot different than understanding what happened - and that's what makes the difference between an average investor and truly great investors.
Gold's crash Monday is a perfect example. The media was falling all over itself as one pundit after the other came on TV to talk about how gold was falling and how far off its highs it was. Few tied the devastating slide to real economic events -- let alone made the connection to actual trading.
But that's my bread and butter. Today I'm going to tell you what really happened and why - from a market insider's perspective. Then I'm going to tell you what to expect next and, most importantly, how you can use the situation to your advantage.
There are three fundamental things going on - all of which are at a very high level and all of which are completely transparent to most investors:
1) Japan caused the biggest single one-day gold sell off in 30 years.
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| Mokans NSE/MCX Trading System Prediction-Gold |
No one sold their gold holdings by choice; many big
players were "forced" to sell gold to meet margin calls
associated with Japanese bond holdings that have gone
wild since "Abenomics" came on to the scene.
players were "forced" to sell gold to meet margin calls
associated with Japanese bond holdings that have gone
wild since "Abenomics" came on to the scene.
You see, newly elected Japanese Prime Minister, Shinzo Abe, and his sidekick Haruhiko Kuroda - Bernanke's contemporary at the Bank of Japan -- have embarked on "Abenomics," or the injection of $1.4 trillion into the Japanese monetary system over the next two years as a means of stimulating the moribund Japanese economy. This will effectively double the Japanese monetary base to 270 trillion yen, or $2.9 trillion USD.
That's hard to grasp in an era of trillion-dollar budgets, so let me put what they're doing into perspective. In order to hit his targets, Kuroda is effectively going to have to inject, print, stimulate or quantitatively ease to the tune of approximately $150 billion a month - that's 76% more than the $85 billion a month Uncle Ben and the Fed have been kicking in here, in an economy that's roughly one-third the size.
As far as I'm concerned, Godzilla just walked out of Tokyo Bay. This is a regime change in the truest sense of the word. It's also the first shot in a 1930s-style currency war, the case for which I laid out in this Money Morning article last February. But that's a story for another time.
Back to the issue at hand.
Kuroda's actions have caused Japanese bond and currency volatility to rise markedly in recent weeks - both have had six sigma events in recent weeks - meaning they have moved several standard deviations past what institutional risk management models are built to accommodate.
The 5-Year Japanese Government Bond Volatility was bad enough.
But the jump in 10-Year Yield Range Volatility was something else entirely. It actually experienced a 13.2 sigma move - meaning it was 13.2 standard deviations from "normal" behavior. Statisticians will tell you that's exceedingly rare...which is why I, of course, will point out that this is the second time Japanese yields have hit these levels in 10 years. Wall Street's wizards are clearly not as smart as they think they are.
Not surprisingly, interest rate volatility jumped off the charts as well, reaching levels consistent with 1998 and 2003 - both of which marked earlier Japanese central bank inflection points.
The computers and the risk management officers went into panic mode.
As a result, anybody with "too much" exposure was effectively forced in knee-jerk reaction to liquidate anything they could to raise cash and bring their holdings back within acceptable risk limits lest they risk a Lehman-style meltdown.
Ordinarily, portfolio managers would make a beeline to Japanese bonds, which are both very liquid and highly marginable. In this case, however, knowing that Team Kuroda is going to function as a buyer of last resort, they turned to their next most marginable assets - the Japanese yen and gold - and sold enough to bring things in line for now.
When they run out of things to sell, they'll shift to "other assets" in the future, but the pool is pretty deep so I don't expect that to happen for a while yet.
SILVER
Although silver's long-term charts are more messy and difficult of interpretation than gold's, on its long-term 7-year chart we can see that it, like gold, is getting close to a lower supporting trend line drawn parallel to the definite upper trend line drawn across the 2006, 2008 and 2011 highs, where the chances are good that it will successfully find support and turn higher, particularly as this trend line has now risen steadily to come into play underpinning the strong support level where the price has repeatedly reversed to the upside over the past 18 months. A short-term dip into this support, which looks likely for reasons we will look at shortly, will be regarded as throwing up an important buying opportunity.
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| Mokans NSE/MCX Trading System Prediction-Silver |
What can we do about it?
First, rely on your trailing stops to capture profits if you've already got gold holdings. You are running trailing stops aren't you?! We talk about these constantly in Money Morning and we use them rigorously to protect our hard-earned gains against just such institutional nonsense.
Trailing stops, in case you are not familiar with them, are risk management tools - stop-loss orders really - that are set at some percentage below your purchase price or the high set since you bought something.
For instance, let's say you buy a stock at $10. You set a 25% trailing stop. It turns out the stock doesn't meet expectations and drops by 50%...all the way to $5. At $7.50, though, your stop kicks in and you're out. That's 25%, so you take a loss that's far less than the masses who have held on.
What about the reverse? If the stock soars 75% to $17.50 a share, then weakens back to $10. Assuming you've been ratcheting your trailing stop up, you'd be out at $13.12, which is 25% below the $17.50 peak. So emotion, as my colleague Bill Patalon noted in a recent Private Briefing column on this topic, "is removed from the equation and you get to keep 31.25% in profits.
Many people may not be happy about that - until they realize a few weeks later that the stock has cratered to $2 a share, meaning that if you held on, your 75% profit would have swung to an 80% loss. Ouch!
It doesn't matter what investment you choose...gold, Apple...anything -- investment can be protected. No investor has to suffer the ravages of a bear market, at least not voluntarily anyway.
Sophisticated investors, by the way, can consider using put options to accomplish the same thing.
Second, change your tactics.
When the big boys get rattled - why doesn't really matter - that's often a great buying opportunity.
My favorite way to capitalize on this is to change up tactics, shifting from a "buy it all at once" approach to a "buy it over time" discipline.
Dollar cost averaging works really well for this because it's simple and easy to implement. Plus it injects discipline into what is otherwise an emotionally charged situation - buying into steep declines. Over time, the advantage really adds up because dollar cost averaging helps you buy more when prices are lower and less when they are higher.
Studies suggest that this simple tactic can boost returns by several percentage points over time. I particularly like the fact that it puts you on an even playing field with the big boys...they can't "game" you if you're not playing by their rules and aren't putting yourself in a situation where they can take advantage of you.
Third, sharpen your pencil.
Many great companies get put on sale when the big boys panic and start "cross-selling." If you're sharp and have already got a "buy" list of the best and brightest that you'd like to own, you can pounce. It's one of the few times you can take "them" to the cleaners.
My favorites right now are the "glocals" I talk about so frequently. These are companies with fortress-like balance sheets and consistent, strong dividend track records in industry segments like biotech, energy and defense technology, all three of which the world needs rather than just wants.
The upshot on gold?
Many investors are fearful that the end of gold's run is near and I don't blame them one bit. It's hard not to think so under the circumstances that led to Monday's pummeling.
Every analyst from here to Saigon seems determined to revise forecasts lower. Societe Generale of France has issued a report entitled, The End of the Gold Era and none other than Goldman Sachs has issued missives advising clients that gold's done.
Fine...just remember that Wall Street has a long, sordid history of telling the public one thing and doing another.
If you're bothered by the thought of purchasing gold in the face of still more declines, try not to be. And, ask yourself if you'd rather buy something that's been put on sale or something that's too expensive?
No matter what happens with all the fancy modeling, no matter how the Fed, the ECB or the BOJ position themselves, fiat currencies are doomed to fail. History is very clear on this.
Gold, on the other hand continues to represent real wealth, and for this reason investors should continue to buy it...not all at once and not in isolation, but as part of a carefully reasoned, imminently practical and well-proven investment strategy.
Speculators...you're on your own.
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