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Gold, Silver and Stocks in a Financial Panic

Commodities / Gold & Silver Stocks Apr 15, 2011 - 01:37 AM GMT

By: Jesse


Best Financial Markets Analysis ArticleGold is resilient, bouncing off its tentative right shoulder support. Silver is just awesome, taking no prisoners.

The commodity commentary on the Bloomberg network was particularly ridiculous today. They drew a parallel between the commodity rise into 2008 and the subsequent sharp decline with the rise into 2011, suggesting that there will be a similar decline, without ever mentioning the cause, using ominous sounding words and innuendo.

Uh, as I recall there was a stock market crash in 2008 that pulled down everything including commodities. Funny, they keep forgetting to mention that while predicting a waterfall decline in commodities, and endlessly touting equities.

I will repeat as I have done so over and over, that if there is a general liquidation of all financial assets, gold and silver will take a hit as well, along with most other commodities. Silver will decrease further because it has a high beta or variability. Since the miners have a correlation to stocks they will take a hit depending on their beta.

This will most likely represent a buying opportunity if you have the right time horizon and capitalization, and of course depending on your economic outlook, because gold and silver tend to recover more quickly than stocks if there is an economic recovery.

Why? Because money supply and credit expansion lead productive GDP growth, and in some cases as we have now to a much greater degree than normal because the transmission mechanism between credit and the real economy is broken, with a heavy tax being placed on the inflow of new money by the outsized financial sector.

This is how it also happened in the Crash of 1929 and the decline of US equities and valuations into the trough in 1933. And it will most likely happen like this again even when there is an eventual recovery with legitimate and substantial reform. I expect that reform to also include a significant restructuring of US debt, the international money reserves and arrangements, and of course the US dollar.

*Could* something else happen? Yes, and in that case I would do something else. That is what is called decision making based on data, not speculating on nonsensical quackery and theories, ignoring the actual data provided by the markets and the economy until you run out of money to play the game.

If there is a waterfall decline in stocks, which is a possibility, I would expect to have my trading account weighted to the short side by the time it gets underway, and make a significant sum of money as I have done the last two times this happened in the past ten years. I would expect not to touch any of my long term gold and silver holdings and take the charges of turning over long term assets such as bullion. I will not touch them until something fundamentally changes in the makeup of the dollar based money system.

Trying to get positioned well ahead of improbable events is generally pretty dumb, the hallmark of an amateur, but especially if you are doing so using financial instruments like triple ETFs with lots of valuation slippage, and take them as long term positions, thereby almost guaranteeing a loss even if you are eventually right.

Yes anything can happen, but as Walter Bagehot so appropriately observed, 'Life is a school of probability.'

By Jesse

Welcome to Jesse's Café Américain - These are personal observations about the economy and the markets. In providing information, we hope this allows you to make your own decisions in an informed manner, even if it is from learning by our mistakes, which are many.

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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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