First Rule of Investing - When Everyone Else Panics - You Don't!

The world woke up Monday morning to a sound of crashing gold; down from $1700 to less than $1400 because once again, that little country of Cyprus is causing problems. Due to their enormous financial problems, the government of Cyprus decided to sell its strategic gold reserves and that sent the markets reeling. Would Spain & Greece follow suit? The impact of this on investors world-wide is being felt and the question on everyone's mind is "what do I do?"

OK, so you're a gold bug, or you've followed the advice of the Society and created your own strategic reserve of commodities (up to around 20% of your portfolio) and you're seeing gold drop precipitously today. Some have said "I've never seen anything like this before" referring to the gold sell off. Should you jump on the band wagon and get out before the price drops to zero? Simple answer - NO. Here's the reality; in the near term prices of commodities can fluctuate widely due to near term supply & demand imbalances. Clearly, Cyprus flooding the market with gold creates a supply glut which drives prices down, and if Greece & Spain do it, well, there's more available gold. But remember while the economic basket cases are fire-selling their gold, Russia and China are buying. The reason, although the price is dropping in the near term, inflation is still a real possibility because the fiscal policies of western governments hasn't changed.

Here's the point of course, if you purchased gold or other commodities as a strategic inflation hedge in your portfolio, the reason you purchased that hedge has not changed; has it? So don't be in such a rush to sell your position; take a breath and relax first. Remember how many people got hurt when the DOW fell by almost 50% in 2008, only to recover and go to new heights just five years later. The strategic benefit of commodities in your portfolio is still in place so even if you see declines in the short run, that doesn't mean you jump on the band wagon and sell.

There are of course other things to consider; which commodities do you own, what is the long-term outlook for that commodity, or can you hedge your positions. The answer on both fronts is interesting. Regarding the first, the strategic outlook for commodities, when it comes to gold the development of Graphene could make a huge difference. This is one of the super-materials just discovered and its' stronger than steel, lighter than aluminum, more conductive than gold and its dirt cheap. This is far more important to me than is the short term Cypriot sell off. The discovery of this first ever 2-dimensional material is a game changer and causes me to think hard about which commodities I own. Frankly, as a result of the development of Graphene, we could see water eliminated as a strategic concern which would create a revolution in agriculture as large as or perhaps even larger than we saw in the 20th century; the result, food prices come down. It could replace gold and other metals in manufacturing which would result in prices coming down. This has not yet commercialized to a point where I would necessarily change the underlying concept of holding commodities to protect against currency devaluations, that's a likely nearer term effect than is the "G" revolution.

The second issue is hedging. As Society Members know, you can buy insurance on things using the options markets and if you're truly concerned about the prices of stocks, commodities, or anything else you own declining, you can choose to participate in the options markets which allow you to fully hedge your positions.

The bottom line is that you can never allow yourself to panic when investing. Think rationally and coldly about your positions and when considering selling (or buying) think about the reasons you have for doing so. If you own an asset like gold for example, if the reason you bought it hasn't changed don't let a short-term hiccup in the market causes you to do something you otherwise wouldn't have. Define yourself, are you a trader, or an investor.

at 8:55 PM
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