The critical point where bubbles end happens as investors begin to think that the rally is over. It is when this opinion travels deep into the system and becomes generalized that the system ends up in a crash. The paradox here is that a crash is often (and mistakenly) characterized as “market chaos.” In fact, it is the opposite: a crash reflects a highly ordered market, when everyone does the same thing (i.e. sell). A truly “chaotic” market is one where everyone is doing something different, interactions offset each other and price volatility remains low.
However, the psychological effects of the crash reverberated across the nation as businesses became aware of the difficulties in securing capital market investments for new projects and expansions. Business uncertainty naturally affects job security for employees, and as the American worker (the consumer) faced uncertainty with regards to income, naturally the propensity to consume declined. The decline in stock prices caused bankruptcies and severe macroeconomic difficulties, including contraction of credit, business closures, firing of workers, bank failures, decline of the money supply, and other economically depressing events.
No mention of the paper trading driving the price down while banks and foreign governments are buying big time on this manipulated market. If these entities are buying these metals they see the value, not to mention that every major nation has a currency based on huge deficits. So where is the value? Precious metals that have retained value for thousands or years or paper currency that is backed by nothing more that a politicians promise?
BMO’s senior economist Benjamin Tal said in a Toronto Star report on October 14th, the Ontario Government’s Places to Grow program was primarily responsible for the fast rising prices in the GTA market. He also suggests other red tape factors worsened the situation. Prices in Newmarket, Markham, Mississauga, Richmond Hill, Bradford East Gwillimbury and Aurora have definitly crashed.
Finally, once you feel you've got a portfolio that will provide sufficient gains during rising markets and enough protection during routs so you'll be able to hang on until the eventual recovery, stick with that mix, except for occasional rebalancing, regardless of what's going on in the market. The idea is to make sure your portfolio doesn't become too aggressive during market upswings or too conservative when stocks take a hit.
Preparation is key. The best time to react to any potential market crash is before it occurs. Not after. Reacting in the moment can lead to expensive and costly mistakes. For example, if you saw that socks were on sale, you'd be more interested in buying socks. However, when it comes to stocks, people take a different view. When stocks are on sale, as can occur in a market crash, then often investors' instincts are to run away. Thinking about your strategy ahead of time and writing it down, just in a couple of paragraphs, can be key. Then if the markets do crash, make sure to look at that document before you act.
×