This decline will be a huge educator for all of whom I refer to as the amateur commodity traders out there. As many of you know, I think that for many investors commodities are included in their portfolios with no rational forethought. Remember, buying a commodity is not like buying stock in an operating company. The problem is that for many there is no rational behind these investments. There are no balance sheets, no financial stats, just a bunch of emotional and fundamental hunches.
So when the selloffs begin, no one can come up any logical reasons for the price that these are really worth in the markets. The reality is everyone just panics and sells out. We are seeing this in silver and beginning in gold. I have discussed several times over the past couple of months that gold is in its final leg up. This finally sequence is the most risky, especially because there is no reliable way to estimate where the prices will stop advancing and begin a full blown price collapse.
This is the case for many commodities in the current environment as prices become very volatile. The prices can snap back as fast as the decline, only to resume the decline out of nowhere. During the next several weeks, the education of risk in commodities will be best illustrated with this volatility. This action could also signal the beginning of a new trading range for the stock market.
So will the next move be a downward one for stocks? The odds right now are we are looking at a week or two of lower stock prices. This does not mean an end to inflation or a strengthening of the dollar. It just means that we can expect price weakness in equities over the next week or so. Of this also spells opportunity.
Show what moves should we make now? I will get into that on my next commentary.
PS: I will be making 4 presentations this week at the Las Vegas Money Show. I hope to see you there!
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