I am a fan of quoting the famous George Soros saying that the “market is always wrong.”
Soros came up with his theory of reflexivity, which argues against the efficient market theory.
“Reflexivity is discordant with equilibrium theory, which stipulates that markets move towards equilibrium and that non-equilibrium fluctuations are merely random noise that will soon be corrected. In equilibrium theory, prices in the long run at equilibrium reflect the underlying fundamentals, which are unaffected by prices. Reflexivity asserts that prices do in fact influence the fundamentals and that these newly-influenced set of fundamentals then proceed to change expectations, thus influencing prices; the process continues in a self-reinforcing pattern. Because the pattern is self-reinforcing, markets tend towards disequilibrium. Sooner or later they reach a point where the sentiment is reversed and negative expectations become self-reinforcing in the downward direction, thereby explaining the familiar pattern of boom and bust cycles." (Source: Wikipedia)
In a nutshell, the market is always wrong.
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For example, in 2007 when the S&P was 1,500 and the Dow was above 14,000 despite the blowing up of the subprime market, the market was pricing in a soft landing or no recession at all and it was wrong. In 2009, when the S&P fell below its late 2008 low and went below 700, it was pricing in a collapse, which was wrong as well.
At the moment, we have the Amex Gold bugs index (HUI) falling to 417 as I write this, or its lowest level since March 2010 when gold was hovering in the $1,350-an-ounce range (gold is currently above $1,625 an ounce).
The HUI to gold ratio, which judges valuation on the equities compared to the metal, is hovering near 26 percent, or its lowest since the fourth quarter of 2008 when gold stocks were crashing due to the financial crisis.
I think that gold stocks are at a great value here and by some accounts are priced for $1,000 gold! Therefore, you can buy many of these stocks for 60 cents on the dollar.
Right now, I think that gold stocks are in the middle of a reflexivity pattern. For some reason, they are undershooting the price of gold and becoming incredibly cheap.
I think that investors should take advantage of this “wrong” pattern.
About the Author: David Skarica David Skarica is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He also writes the Gold Stock Adviser. Discover more by Clicking Here Now.
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