Ever been told the story about ‘the Herd’?


It is not a new story. It’s just the old adage about investors and the trends of markets resembling a “herd” of like-minded folk. Most often portrayed as sharing a common delusion in regards to where they are headed. Quite often the story includes images of the herd merrily stampeding off a cliff, while a lone dissenting voice tries to move against the flow.

Pick up just about any financial commentary today and you will find discussion about the “next fall” in markets. This is quite a logical outlook after a rise of more than 40% from the Australian sharemarket lows of March this year. However, when markets are ‘firing’ like they are most people don’t really want to sell out until the ‘last minute’. Again, this seems logical, as the market can and does put on 10%+ in a matter of days when trends reach their peak. However, the lifts eventually stretch valuations and it takes a while before underlying profits and earnings can lift to help justify any further increases in prices for securities. When this stretching process lasts for a while then the reactions to any negative or positive data can be more extreme.

Here is an example… With the sharemarket only open for a little while, have a look at a shortlist of some of the top gaining shares …

A snapshot of market activity early on the 3rd September 2009

A snapshot of market activity early on the 3rd September 2009

Notice any commonality? How about “gold”?

Gold is often seen as a hedge against inflation and a form of security in difficult times. It almost doesn’t matter whether it is or it isn’t, so long as everyone agrees that it is. If they do then they will buy lots of it when the outlook is worrysome and that extra demand will most likely lift prices. You can see from the change in sentiment today that a lot of people have suddenly decided that gold is a good thing to be buying right now.

Remember the “golden” rule in this site – None of this is advice, and you should not act on anything that is discussed here without considering your own circumstances, objectives and risk tolerances or you should seek professional assistance before making any investment decisions. There, we’ve covered that little requirement.

So what does this mean? Well, i have my opinions but not the time to cover them in any detail today. An interested person would look at trends in gold for the recent past and look to try to understand what relativity there is between it and other factors such as inflation, oil, interest rates, market volatility and trading operations. A very interested person would also look at the attitudes of central banks to gold – they are the holders of enough of the glowing yellow stuff to completely alter any price movements at a whim.

Interesting times indeed.


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