More from Penny Sleuth:

Congratulations on making it through yet another week of panic, margin calls, and forced selling! If you’re surviving, and you’re not down too much this year, you’re better off than most money managers.

Out of the thousands of hedge funds in existence, hundreds are closing up shop and liquidating, if the past weeks’ trading action was any indication.

Many of these hedge funds should never have been started to begin with, because their illusory gains during the credit bubble were too often made with leverage, rather than analytical talent.

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The Good with the Bad and the Ugly

Yet their demise hurts anyone trying to manage an investment portfolio in a prudent manner — similar to how Bear Stearns and Lehman Brothers permanently stained the entire investment banking industry.

It’s a case of a few bad apples spoiling the whole barrel. Unfortunately, it remains to be seen how regulators and politicians will punish every investor, including those who have acted prudently.

For example, I just read a publicly released copy of a letter dated Oct. 2, sent from the U.S. Congress to Harbinger Capital Partners. It asks Phil Falcone of Harbinger Capital to reveal practically everything that’s confidential about his funds and to testify before a committee. Let’s hope U.S. regulators don’t take action to drive even more investment talent overseas, because we need them here to help keep our markets efficient.

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Hidden Government “100-F Documents”… That Let You Predict Which Stocks Will Go up or Down

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The Baby’s Bathwater

It amazes me how long this environment of panic has lasted. Quality companies in the oil services, coal, steel, and agriculture sectors were liquidated in violent fashion — many of them down 20% in a day and 50% over the past month. These are real companies performing vital functions necessary to keep the lights on and food on shelves, not speculative Internet stocks.

The list of victims includes companies that are very likely to deliver good earnings over the next few years.  There are some screaming bargains out there — unless, of course, half of the world’s population stops using food, electricity, and oil. I doubt that will happen in a world of unfettered deficits and central banks, but anything’s possible.

Source: Hedge Funds Forced to Cover

Cracking above 40,000 Deutsche Marks Per Kilo, the price of gold – when converted back from the Euros that German investors now clutch – promptly sank almost 14% from that 27-year top.

In the ensuing sell-off (to date) it bottomed (so far) at the equivalent of €561 per ounce on Tuesday. (You’ll note the caveats. The last real sell-off took the Euro gold price right down to a 20% loss.)

But our deep mistrust of technical analysis has failed to beat our fat crayons again. Because the gold market low (so far) coincides precisely with another key level in the metal’s long-term ascent:

The big “cathedral top” of May 2006…

The mainstream British and European press ignores pretty much all investment news by screwing its eyes tight and hoping the public won’t mind. Which we don’t, as a rule.

It takes some kind of mania to shake the mass of so-called “savers” to demand prices on tap (tech stocks at the end of ’90s; real estate until summer last year). Only a genuine scandal leads the press to wheel out a half-decent analysis (Enron, Northern Rock, Bear Stearns).

So it was disquieting to find gold splashed across the London media last month. Just as in May 2006 – the last blow-off top – the shiny yellow stuff even made an appearance in the tabloids, on radio and on breakfast TV. And the last time gold made headlines on the BBC news, any British, French, German or Italian investors choosing to buy gold lost one fifth of their money inside a month.

From 12 May 2006 to mid-June, the price vs. the Euro sank from €561 down to €450 per ounce. It took fully 18 months to recover that level, breaking it decisively at the very end of 2007.

And your crayon doesn’t need blunting to match that top with this week’s low (to date). So for now at least, that level – of €561 per ounce – marks the bottom of the latest plunge to clear weak hands out of the gold market.

Standing almost 14% below the new 27-year high hit on March 3rd this year, that former line of what professional chartists call “resistance” might just prove to be what they’d say is “support”.

If not, it will become “failed support” – the failure being the market’s fault, of course, rather than any error by the analyst or his thick wax crayon.

Adrian Ash
for The Daily Reckoning Australia

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