The Math of Loss
A commentary on recent events by National Gold Group’s Chris Poindexter – October 5, 2011
Once again we see commodities prices going their own way in relation to technical indicators. Crude oil is up on a strengthening dollar and metals are down. Gold is moving opposite currency, as it should, but I think that’s more coincidence than actual alignment to technicals.
Gold is down from yesterday, right now trading off another $16.05 to $1,614.00. Silver is getting hammered, down $1.05 to $29.10.
The volatility in the precious metals markets is tame compared to the stock market, where millisecond programmed trading sends the market into whiplash-inducing gyrations that can cause prices to swing hundreds of points in a day. Such volatility undermines investor confidence in the whole program as the rest of us watch our 401(k) plans get hammered with depressing regularity.
You might think these frequent up and down movements will even out over time, but let me remind you of one of the underlying rules of investing that I touched on in a previous column called The Math of Loss.
The Math of Loss works like this: Suppose you had $1000 invested in the stock market before one of these ever more frequent death drops where the market loses 20 percent. You wake up one day and find your $1,000 is now worth $800. That’s fine, you don’t need the money right now and the market will eventually recover, right? Over the next few months let’s say the market recovers to where it was before the crash and gains back the 20 percent loss.
You might think you have your original investment back but you don’t, a 20 percent gain on $800 only gets you back to $960! When you lose 20 percent in the stock market, the market has to gain back 25 percent just for you to get back even!
What’s happening with these frequent crashes is that your investments are never getting back to even before the next death drop. So, who is benefiting from these wicked sharp drops? The people trading with high speed computers that move to prevent loss and sell at the first whiff of trouble. They sell to minimize their losses, then buy back in when prices tumble. And the difference is coming out of your pocket.
Hopefully that helps you understand why I keep pushing gold and silver as part of your investment strategy. Certainly precious metals are subject to the same math of loss as any other investment, but at least no one can manipulate prices with computers and chisel away at the contents of your safe.
The above commentary is for informational purposes only and is not a solicitation by National Gold Group or Chris Poindexter. It is the commentator’s opinion only and not intended for investment recommendations, and does not necessarily reflect the views of National Gold Group. Any references to outside sources are believed accurate. Past performance is not a guarantee of future results. All commodities involve risk. Investors should consult their financial advisor before making any investment decisions.