By Craig R. Smith
Chairman, Swiss America
May 7, 2010
This week's market actions show the true vulnerability of the global financial world. Unless you have a strong stomach to riding roller coasters, the slogan, "Sell in May" just may pay.
With investors nervous over events in the Euro Zone, single events sent markets plunging. At one point in the trading day the DOW dropped more than 900 points. Reports say that a bad tick on P & G stock showed the stock down 25% in just seconds. To the informed trader that could never happen, but many people panicked.
When it was found to be a bad print, the DJIA went from down 900 to down 350.
The bigger issue is what occurs when the confidence, so essential to paper markets, disappears. Confidence in the system is a critical component to stable markets. When confidence leaves, markets collapse. Not a very good environment when many people's life savings have been sucked back into a very volatile stock market.
However there was a “golden” lining in the midst of the collapse of confidence. Gold rallied 3%, the Yen and U.S. dollar both strengthened. All three are perceived as “safe havens” during the panic that spread through the global markets.
In past major drops in the DOW, gold has also dropped in sympathy, often providing the needed liquidity to cover margin calls. This time was quite different. Today many countries and investors now view gold as the ultimate currency to hold in a crisis. People instinctively know gold is real.
Gold is one of the few assets that is not someone else's liability. Stock value and liquidity depend on the issuer. Gold, on the other hand, does not have a recurring liability. It doesn't need a Credit Default Swap to keep it safe.
The average investor has sat out for many of the recent rallies in the stock market. Myself included. With news headlines now using words like “contagion” and “market panic”, I suspect many will remain in the safety of the sidelines. Placing assets in markets that can drop 900 points in a matter of seconds is not really an investment, it is a “bet”. And like betting, unless one can afford to lose, he or she should stay out.
To quote Will Rogers, “I'm not so concerned about the return on my money as I am about the return of my money”.
So once again in May, 2010 the vulnerable world financial markets reminded investors that paper markets operate on confidence while gold creates confidence. Nothing but gold is “as solid as gold”.