Thursday, December 15, 2011


Article by : Shaun Connell

Gold is down, copper is down, gasoline is down, oil is down, stocks are down, heating oil is down… and the dollar is up.

The reason for this is because cash is the ultimate /short-term/ safe-haven for investors. Over time, cash will lose value, but during times of short bouts of economic turmoil and insanity, cash’s value goes up because everyone is trying to rush to that cash. The US dollar is a good example of this as the world’s reserve currency.

The dollar is up 2% for the year, and is up significantly for the day as well. Considering the US got downgraded, that should tell you something about how much uncertainty exists.

There are plenty of reasons for what’s going on. Liquidation, year end caution, a credit slowdown in China — whenever a market drops in price, there are usually millions of reasons why, with a few “big” reasons leading the charge. With the current drop, here’s what’s likely:

Liquidation. It’s near the end of the year, and investors are looking for good investments to sell so they can salvage profits for the year on some level. This makes them look better on paper to people who are investing with them. Mutual funds are especially susceptible to selling off a long-term winning asset when it begins to “crash” — they want to make sure they get at least some of those profits.

Fear. People are horrified of what’s going on in Europe and Asia. The idea that there’s a possible new recession on the horizon means many investors are going to the one short-term asset that generally does fine during a crash or recession — cash. The dollar is up 2% so far this year, actually.

Reflexivity. Reflexivity means that whatever the market does, the market usually does a little too much because of speculation. This is especially true for commodities, because commodities don’t provide an income.

This means that gold and silver will probably drop “too much” before bouncing back whenever they do bounce back. That could be today or next week or next year. I’m thinking within a few weeks, assuming this isn’t “the crash” that I’ve talked about. There’s no telling.

For the record, I’ve spent the last year explaining that gold and silver are both susceptible to these sorts of crashes, and that’s why everyone should stay away from leverage, and also have cash, bonds, and dividend stocks in their portfolio. Anything else is just too risky.

It’s also possible we’ll see a long period of low gold/silver prices before the “big one” inflationary event that’s inevitable.

This is also another reason you should invest in gold and silver gradually over time, rather than all at once.


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