Market Volatility
By Vedran Vuk
A few readers have inquired, "Why not publish more articles on the market lately; isn't there a lot going on?" There's a good reason, and it can be summed up in one word: volatility. We haven't seen a period of sustained volatility of this magnitude in years. Usually the VIX Index likes to take a jump, followed by a rather sudden drop downward. Today we're in a completely different situation, with a sustained high VIX and a market that has taken a beating but certainly hasn't crashed.
In this environment, many forecasters have already swallowed their own words a dozen times. The market jumps 250 points one day, and they predict the start of a rally. The next day, the market crashes 300 points, and the bears hit the headlines. In my opinion, it's borderline foolish to draw massive multimonth or multiyear implications from the moves of a single day in a highly volatile environment.
Furthermore, the majority of these swings have been caused by fear - or even the fear of fear - in the market. We still don't know what's going to happen in Europe. It's quite possible that one of the PIIGS will default sometime in the next month, but kicking the can down the road another year isn't outside the realm of possibility either. Check the last major spike in volatility in mid-2010. We've been in this exact spot before - only now it's more serious. Still, it's difficult to say if we're approaching the moment of truth for Europe.
What do we know, and what can we say for sure? The eurozone and in particular the PIIGS are doomed. We didn't wake up to this fact last month, like the majority of the market did. You've been reading about it for years in our newsletters. Second, gold continues to be a major trend. Even if we see a sell-off similar to 2008, the fundamentals for gold will not change. In fact, such an event would mean a big-time shopping season. Since the last market crash, gold has had an incredible performance. If the market takes another major dive, I would expect a prolonging of the long-term gold bull market, even if prices have a temporary setback. The governments of the world will be in even worse shape, and they will react like they always do... by printing more money.
Sure, interest rates are low, but world central banks can take them lower. Consider that the Swiss National Bank recently lowered its short-term rate from 0.25% to zero. If another crisis comes, you can bet that the European Central Bank is going to take rates from 1.5% to nada in a heartbeat; that's going to be good news for gold.
In short, don't let volatile numbers guide your decisions. Volatility necessarily occurs from competing visions in the market. If you're comfortable with your idea of the market and the state of the US government, stay the course and don't let the confusion of others drive your investments.
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