Commodities investors were taken for quite a ride this week as we saw bullion drop from just under $1600/oz to $1350/oz, a 15% decrease in just 2 trading days. Silver also dropped considerably in the same time frame, 16%. Since then investors have sworn that the recovery in stocks is over and that economic ruin is imminent. When trading, this can be a dangerous philosophy to pursue.
Let us first look at what exactly happened to gold. Dr. Paul Craig Roberts commented on the gold market in John Mauldin’s latest newsletter with some startling facts. On Friday April 12th, 500 tons of paper gold was sold. That’s 16 million ounces, and at a price of $1550/oz, worth $24.8 billion. The move brought gold down $73/oz on Friday, meaning that the sellers (who theoretically would have spread their sales out over the course of the day) lost $1.17 billion. Roberts asks the important question, “Who can afford that type of loss?”
It is of our opinion that this is market manipulation at its finest, more than likely by the Federal Reserve. We have contended for years that the Fed does not have the gold reserves on hand that they claim they have, and when the State of Texas wants their gold reserves back, that can cause a problem. We believe the Federal Open Market Committee intentionally drove the price of gold down in an effort to buy back the metal at a discounted price. The panic from Friday bled over to Monday, and metals prices dropped even more, which then bled over to equities.
Whatever specifically caused the drop in metals is not the focus of this piece; it is how investors responded to equities. Between Thursday the 11th and Tuesday the 16th, the Dow Jones fell by a measly 1.75%. After hearing commentators and pundits weigh in following the drop, you would have thought that we were entering an outright depression. We heard everything from “the bull market in metals is finished” to “the fake recovery comes crashing down” to “get out of equities while you still can,” all over 1.75%.
The fact of the matter is that whether you are a professional investor or managing your own account, you cannot be afraid to take a little risk. The claim that equities are gearing up for a long term bear market is unfounded by any data that we have seen. If investors are unable to separate the difference between a one-and-done event and long term economic trends, their portfolios will be in for a world of hurt. Furthermore, if 1.75% affects your decisions and can scare you out of a position that easily, equities investing may not be your calling.
Long-term, we see this event as merely a hiccup. Our forecast for the US economy is still very positive, and the numbers are starting to reflect that notion. An overnight recovery was not to be expected, and we still have a long way to go, but we are definitely moving in the right direction, despite what the pundits will have you believe.