Out-Of-Control Leverage, Emotion,
Panic
Mike Hoy
Jun 19, 2006
With the recent beatings the markets have taken there is no shortage
of blood in the streets. Historically, in a bull market, this
is a signal of terrific buying opportunity. Is this the case
now? In my opinion the answer is yes!
There is no debate of the fact that the precious metals have
been in a bull market for several years. I have no doubt that
the criteria which created the necessity to be a part of this
bull market are more obvious today than they were several years
ago when this party was just getting started.
There are many questions that individuals can ask to assure
themselves that nothing has changed in the long term scheme of
things; here are a few simple questions that I ask to remind
myself of the fact that "the more things change the more
they remain the same."
(1) Have the governments of the world taken any measures to reign
in their out of control and exponentially growing spending?
(2) Are those who have built huge reserves of US Dollars content
with owning an ever growing percentage of their reserves in worthless
paper that can be created at the whim and discretion of a selected
few throughout the world?
(3) Is the financial system of the world on solid ground?
(4) Have any measures, other than cheap talk, been taken to create
alternatives which will lessen the world's dependency on the
declining supply of fossil fuel which in my opinion is the
world's NUMBER ONE CULPRIT for the growing increases behind inflation?
I could ask a dozen more questions like these but we already
know the simple answers to these questions. I believe the reasons
for owning the precious metals have only intensified and become
more obvious as each day passes. In the end, if the world continues
moving in the direction that it is currently headed ownership
of precious metals and precious metal stocks may be the only
way to protect ones assets.
I have read many articles which state the blame for the severity
of the selloff in the markets are as a result of the "Fed
This" and the "Fed That" and "Bernanke This"
and Bernanke That!"
In my opinion, the single most important factor behind the
severity of the selloff in the markets evolves around the leverage
associated with pure speculation and greed. Without a doubt
the accelerating price appreciation in the precious metals was
beginning to get carried away to the upside. Gold and silver
prices were being pushed higher as a result of every "Tom,
Dick and Harry" jumping on board the new found bandwagon.
The implosion of the excessive leverage of the hedge funds
and commodity funds, in my opinion, was the largest contributing
factor in taking what could have been a normal correction and
turning it into a "Full Fledged Rout!" The speculation
and margin calls fed on themselves to wipe these people out.
I am sure there will be some very interesting stories that come
to light after the dust settles on these markets.
Most of this speculative money entered this sector solely
because of "action and momentum!" Most of these people
do not have a clue as to why they should be exposed to the precious
metals sector nor do they care! Their only interest lies
in the direction and volatility of the sector. As far as I'm
concerned I am glad to see them cleaned out! By cleaning this
"froth" out of the market the precious metals sector
can get back to "business as usual."
Those serious investors who are accumulating gold and silver
as a necessity to protect their wealth and assets are not going
to change their investment philosophies as a result of gold and
silver prices becoming more affordable. I believe the true advocates
of gold and silver are grinning from ear to ear as a result of
the sharp pullback in prices. Pure logic dictates that the quantities
of gold and silver that can be purchased in a correction only
increases. An example of this would be the demand for gasoline
if the price were to fall over 20% at the pump in a very short
period of time; there would be long lines to take advantage of
the temporary discount. Make no mistake; everyone would want
to fill their tanks!
Those of you who have pruned your portfolios of stocks you no
longer want to own know that this cash on the sidelines has come
in very handy. In fact, if you are like me, you have been able
to pick up some great bargains. This is what corrections are
all about; taking advantage of other people's mistakes!
Nobody knows exactly where the bottom will be in the price of
the precious metals as well as the precious metal stocks; therefore
I am adding to my positions gradually rather than dumping everything
in all at once.
If I am correct with this line of reasoning then I am going to
look back on the opportunities in today's markets and be very
thankful that I built my positions at a time when I was seeing
my favorite stocks at prices I never thought I would see again.
In this pullback I have also learned that the investors I stay
in closest contact with all share the same thinking that I have.
They are amazed at the severity of the pullback but they all
realize the value of what they own. They, like me, know that
corrections are a normal and healthy part of all markets.
They are also very well versed on the fundamentals and the direction
of the companies they own.
The funny thing about those who seem to be most concerned or
on the verge of panic as a result of the severity of the correction
all share one very distinct trait in common and that trait deals
with the fact that they are all advocates of technical analysis
paying absolutely no attention to the underlying fundamentals
of the investments they own.
I have had three people contact me with pure panic in their voices
and in each case they never once talked about the fundamentals
of the companies they own. All they wanted to talk about was
what they believed their charts were trying to tell them.
Please do not think that I do not believe in technical analysis
as I do. I was a student of TA back in the 70's when very few
charting services even existed. Those services that did exist
cost a fortune to subscribe to. I do not give a great deal of
credence to charts when dealing with low volume companies where
one major buyer or seller can make a chart look like anything
he or she desires. I do pay attention to violations of support
and resistance levels knowing that this normally precedes a greater
move in the same direction.
I would very much like to help these people who have panicked
or are on the verge of panic, but past experience tells me that
they are their own worst enemies and no amount of effort on my
part can help them until they learn to help themselves. Knowledge
and education, which usually means starting from the beginning,
may be their only salvation. Their greatest enemies are their
emotions and acting on impulse. In the end, their greatest source
of education will wind up being experience and that unfortunately
will come at a very high cost!
As always, everything I write, that I share with you, is my opinion
and my opinion alone. It is up to each of you to do your own
homework and due diligence as the possibility always exists that
I can be wrong.
Mike
Hoy
email: mhoy@neb.rr.com
tel: 402-483-4484 Call between 8:00AM and 10:00 PM Central Time.
321gold Inc
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