Investors flee from risk and sell … gold?

This just in from Reuters:

The global flight from risk knocked precious metals again on Friday, with gold falling below $650 an ounce for the first time in three weeks as shaky global stock markets prompted investors to reduce positions in commodities.
Investors often buy gold as a safe bet when financial markets look unstable, but investors are keen to unload the metal after plunges in global equity markets this week, analysts said.

So much for that “flight from risk” argument that I and a lot of other people have been making. Or maybe it’s just that gold has gotten so expensive that now it’s risky. In any case, it’s a nice lesson in the dangers of offering any explanation for the behavior of financial markets.

To trot out another fine quote from philosopher/derivatives trader Nassim Nicholas Taleb‘s soon-to-be-published book The Black Swan (he’s writing about the insanity that enveloped his native Lebanon in the early 1980s):

Much of what took place would have been deemed completely crazy with respect to the past. Yet it did not seem crazy after the events. This retrospective plausibility causes a discounting of the rarity and conceivability of the event. I later saw the exact same illusion of understanding in business success and the financial markets.

Spain’s Prime Minister Warns Country Is in Danger of Being Shut Out of Markets

MADRID — Spain‘s prime minister warned Wednesday that the country faced the danger of being locked out of international markets as investors continued to fret about the future of the euro and Greece’s place in the 17-country eurozone.

“Right now there is a serious risk that (investors) will not lend us money or they will do so at an astronomical rate,” Mariano Rajoy told Spanish lawmakers.

Stanley E.Katz

The breaking up of the carry trade in Yen and Swiss Francs has been the precursor of the flight to quality in government bonds and the dumping and ditching of precious metals.

An interesting occurance has been that the $ did not plunge as much as expected and it now seems prudent for investors to re-adjust their trading ranges in all investment classes.

I expect the $ to show the way in the next weeks and the bias will be downwards.

Oil is not a catalyst yet, but it could rebound and gold and silver will again start rallying.
Good luck.
http://thelearningcurve.blogspot.com muckdog

The US market sold off last week, due to worries about an economic slowdown or even a recession (Greenspan). If the US economy is slowing down, then the risk of inflation is less. If the US economy is heading towards a recession, then forget about inflation. Neither of these scenarios is bullish for gold.

Money went into bonds last week.
http://www.iim-edu.org/u.s.economyrisks/ U.S. Economic Research

International Institute of Management (IIM) published a research report addressing the U.S. economic risks for the next decade. The global flight from risk was forcasted in this report. The most interesting thing about the report is that all the warning signs listed in the paper are coming true, including this month’s stock market meltdown, subprime pain, investment deficit and trade deficit report. The complete text of the report can be found on http://www.iim-edu.org/u.s.economyrisks/

What is disturbing about the subject is that few economists disagreed with the presidential state of economy speech on Jan 31st (citing strong Down Jones performance and economic growth). The author of the paper explains the interplay of U.S. and global economic forces in a detailed yet easy to understand logic for non-economists. According to the report, the worst thing that could happen to the U.S. economy is the loss of investor’s confidence. Med Yones, the president of the research, links current economic challenges to globalization forces and government policies. He recommends unusual strategies to mitigate the risks.

The market is full of noise and conflicting reports on the outlook of the U.S. economy, this paper cuts through all of the noise and focuses on the big picture rather than short term stock market behavior. It’s a sobering assessment of the future of U.S. socioeconomic health.

On March 11th, Reuters published the a story, citing the part of the report http://www.reuters.com/article/hotStocksNews/idUSN0925116620070311

Another supporting point of view can be found in an article written by John Freeland, PhD, Credit Card Nation – Should the Government Get Credit Counseling?
http://www.tpmcafe.com/blog/john_freeland/2007/mar/01/credit_card_nation_should_the_government_get_credit_counseling