A Replay of 2008?

The current environment most resembles that of late 2008, but with one key difference: our leaders are now somewhat aware of the scale of this crisis and they are prepared to support markets. Heck even the Swiss are devaluing, which means a retest of new lows in stocks is unlikely in most markets. Competitive currency valuations are just one reason why I am just itching to be positioned long when the time is right.

Gold is still oversold, so we are going to see temporary spikes like we did earlier this week. However, be careful not to mistake these oversold bounces for a sustained rally; further weakness probably lies ahead. The mid $1500′s is one decent spot to add, and if we see the $1400′s, it will be time to get very aggressive.

I always considered the efficient market theory a load of garbage. Inefficiencies in markets always develop, and it is the job of the astute investor to profit from them. By believing in the efficient market theory, you allow yourself to fall victim to a lot of logical traps. For example, “Since gold is falling, we must be experiencing deflation, which means yields are going to fall, which means Treasuries are the safest investment around.” This kind of severely flawed thinking will get you crushed, if it hasn't already.

Treasuries are a huge bubble, but I have only a very small short position because I know irrationality lasts longer than anyone expects. I'll be adding on the next spike, and even if I incur short-term losses, it doesn't bother me. I was able to catch the gold bull market because I was looking 3-5 years down the line. Do you think anyone who bought 3 years ago is complaining about buying at $800 instead of $725? In the short-term the losses seem insufferable; in the long-term, they are a fly on an elephant's behind.

Treasury yields fell in 2008, but I think they are going to easily double from here. The debt crisis in the U.S. and Europe just goes from bad to worse, and it's clear no viable solutions are on the table. The more talking heads on TV say Treasuries are the place to be, the more I am inclined to go short.

The markets are going to get volatile, but before this year is over, gold should be volatile to the upside.

A Replay of 2008? is a post from: Expected Returns