Thursday, August 11, 2011

DOW Up 420 - Gold Smashed

This market is certainly not for the faint of heart.

The stock market began to roar this morning when news came from Europe that there would be bans on short sales, just as our stock exchanges banned short sales on financial companies in the fall of 2008.

When the ban on our financial stocks was announced back in 2008 there was a massive rally in both the general market and the financial stocks, and then they fell over 48% over the next few weeks.

Gold was smashed this afternoon as investors moved back into the "risk on" trade.  Margins were raised on gold last night after trading, which usually leads to sharply lower prices the following day as investors have to raise cash to cover the margin calls.

Gold is also way overdue for a sharp correction.  The recent spike was unsustainable, just as silver's spike was unsustainable earlier this year.  Will it fall further from here?  Is this a temporary bottom?  I have no idea, but I believe prices will be much higher two years from now.

The interesting part of gold's move today was that the gold mining shares rose in the face of the underlying commodity sell off.  It has been widely speculated that the recent trade amongst hedge funds has been to go long gold bullion and short gold mining shares.  This has left the mining shares deeply undervalued in comparison to the underlying price of bullion.

Will the miners begin to catch up now?  I have no idea, but I believe well managed mining stock share prices will outperform bullion over the next year. 



No comments:

Post a Comment