Gold stocks, and the stock market at large, were up nicely today. I asked Dr. Janice Dorn, the trading doctor, why gold stocks were getting particularly hammered last weeks and she said that there was a lot of forced liquidation from hedge funds. A fair number of hedge funds had taken large positions in gold stocks and as that market dropped, many of them were forced to liquidate. That is the problem with massive amounts of leverage: even if you’ve might the correct long term bets, you can still get washed out in a short-term leg down.
Market Technicians, formerly called chartists, like to study the price movement of charts and make predictions based on how the chart is moving. In his book The Misbehavior of Markets Dr. Benoit Mandelbrot said that markets could not be predicted this way; that market data was chaotic but would seem patterned. Doug Wakefield, of Best Minds Inc, has been in the business for years and feels that Mandelbrot is wrong on that particular point.
No one knows the truth. I can tell you that I got a unsolicited email three weeks ago telling me that it was a great time to buy gold. Then last week I got another unsolicited email from the same service telling me to short gold. As I mentioned in a prior post, I believe that the gold market is intentionally manipulated by the central banks in order to discourage people from owning the stuff. They know that people follow trading methodologies based on what the chart looks like, and they are therefore able to knock the gold market around in order to paint a picture that tells the world to sell.
For me, I think that the market is as Warren Buffet said, “A voting machine in the short run, a weighing machine in the long run.” Gold has a wonderful future ahead of it, and I believe that’s why gold stocks rallied over 10% today. I’m crossing my fingers hoping that today marks the end of the forced liquidation of gold stocks but who knows. I was just happy to see a lot of green in my account today.
I do know that if world leaders keep making noise about going back to some form of the “Bretton Woods” agreement that gold is going to go crazy. For any country to return to Bretton Woods it would have to acquire a fair amount of coin to back it’s currency, not to mention that value of the dollar would fall significantly as it was displaced as the global reserve currency.