by Alexander Green, Chief Investment Strategist, The Oxford Club
Tuesday, April 16, 2013
Yesterday’s terrorist attack in Boston, the plunge in gold prices and the 256-point plunge in the Dow have investors across the country asking, “What do I do now?”
The answer – if you’ve been following The Oxford Club‘s advice all along – is “not much.” To understand why, let’s take a closer look at yesterday’s events.
The terrorist attack in Boston is a reminder that our nation’s greatest strength – that we are a free and open society – is also our greatest vulnerability.
We have enemies around the world as well as crazies here at home. It is simply not possible to thwart the intentions of every sick mind bent on creating fear and chaos. While the attack was reprehensible and heartbreaking, we can be grateful that there have been no other successful terrorist attacks on American soil since 9/11 and – given the far greater threat of dirty bombs or chemical weapons – that this one was small-scale and relatively amateurish.
There will now, of course, be greater security measures taken at large-scale public events, but every investor should know that there will be more attacks in the future and that they will buffet the financial markets from time to time.
Gold’s Big Plunge
Of course, yesterday’s stock market sell-off began before the attack and was largely unrelated to it.
The greater concern was the drop in commodity prices and especially gold. Commodity prices dipped because economic growth at the world’s great manufacturing center – China – is coming in below expectations. Still, it is hardly the worst of news that China is now growing at a 7.7% rate instead of the 7.9% rate in the fourth quarter.
This is the kind of “market-moving event” that becomes trivial very quickly.
Gold is a different story, however.
It is selling off for a number of reasons. For starters, every smart trader knows that the trend is your friend – and gold’s path right now is anything but neighborly. The metal continued its longer-term decline yesterday, tumbling $140.30, or 9.3%, to a two-year low of $1,361.10.
Why is gold tumbling?
A better question to my mind is “why would it be rising?” Is the financial crisis of a few years ago worsening? No.
Is the dollar crashing? No.
Is inflation soaring? No.
Is the world on the verge of an economic or political calamity? The consensus, again, is no.
So why should gold maintain the lofty heights it hit a few years ago when it looked like the world was coming apart at the seams?
Easy Does It
Of course, the short-term reason that gold is selling off is fear that Cyprus and other troubled European countries will sell down their gold reserves to pay for their bailouts.
This underscores one of the unique risks of investing in gold, that central bank selling or new discoveries of ore can suddenly cause the value of your holdings to plunge. Despite its many attributes – scarcity, uniformity, divisibility and intrinsic value – gold is easily the most unpredictable asset class.
We continue to recommend that members have at least 5% of their portfolio in gold and gold shares.
But let’s remember that the drop in gold – except for those with too much exposure to the metal – is overwhelmingly a good thing. It shows renewed confidence in the economy and the dollar. Gold did exactly the same thing, for instance, when Ronald Reagan came into office and pursued policies to kick-start the economy and squelch inflation.
Overall, our advice remains unchanged. Follow our recommended Asset Allocation Model to diversify your portfolio among several classes of stocks, bonds and metals. Stick to high-quality securities like the ones we are currently recommending. And use our customary trailing stops to protect both your principal and your profits.
The alternative to our anticipatory investment strategy is to use a reactionary one. And that has one major drawback: It doesn’t work.
Editor’s Note: Just as it appears that this gold slump will continue, smart money is beginning to pour into what most people think is a “worthless” commodity.
It’s the world’s sixth most abundant element (in fact, there’s likely some sitting on your desk right now).
Yet as it becomes more popular, it could help turn a $900 stake into over $20,000. That’s because it’s about to completely revolutionize a $350 billion-plus market.