Ben Treece: Coping with volatilityWritten by Ben Treece | | email@example.com
Commodities investors were taken for quite a ride this week as we saw bullion drop from just under $1,600 an ounce to $1,350 an ounce, a 15 percent decrease in just two trading days. Silver also dropped considerably in the same time frame, by 16 percent. 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. Paul Craig Roberts commented on the gold market in John Mauldin’s latest newsletter with some startling facts. On April 12, 500 tons of paper gold was sold. That’s 16 million ounces, and at a price of $1,550 an ounce, worth $24.8 billion. The move brought gold down $73 an ounce that day, meaning that the sellers (who theoretically would have spread their sales out over the course of the day) lost $1.17 billion. Roberts asked the important question, “Who can afford that type of loss?”
This is market manipulation at its finest, more than likely by the Federal Reserve. It has been contended for years that the Fed does not have the gold reserves on hand that it claims, and when the State of Texas wants its gold reserves back, that can cause a problem. 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 April 12 bled over to April 15, 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 April 11 and 16, the Dow Jones fell by a measly 1.75 percent. 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 percent.
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 percent affects your decisions and can scare you out of a position that easily, equities investing may not be your calling.
Long term, this event is merely a hiccup. Our forecast for the U.S. 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.
Ben Treece is a 2009 graduate from the University of Miami (Fla.), BBA International Finance and Marketing. He is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com) and a stockbroker licensed with FINRA, working for Treece Financial Services Corp. The above information is the express opinion of Ben Treece and should not be construed as investment advice or used without outside verification.