Tuesday, April 16, 2013

Gold's 7-sigma move

Zero Hedge says gold had a 7-sigma move, or seven standard deviations. The math seems a bit off, but here is a blurb about 3-sigmas
>> In statistics, the 68–95–99.7 rule — or three-sigma rule, or empirical rule — states that for a normal distribution, nearly all values lie within 3 standard deviations of the mean.

About 68.27% of the values lie within 1 standard deviation of the mean. Similarly, about 95.45% of the values lie within 2 standard deviations of the mean. Nearly all (99.73%) of the values lie within 3 standard deviations of the mean.


and another about 6-sigmas.

Management uses Six Sigma as a technique to maximize the quality of its product. The goal is to achieve the least number of defects per unit of production. A Six Sigma process produces product 99.99966 percent of the time without errors or defects. This translates to 3.4 defects per million units produced.


A painful day for me to be sure, but it would have been much more painful had I sold some puts on gold like I thought about doing. Sometimes the tea leaves don't work out, even with an article in the NY Times and a high profile table pounding from Goldman, sometimes these indicators fail.

Many of us have gold to protect us from 7-sigma moves in the financial markets. As I sometimes write, it is the big four historic events that we insure against: Major war, revolution, famine, plague. These are the events that can topple governments, cause their currency to go to zero. In the absence of these events, it just doesn't happen to major powers. Minor powers are another thing.

Some cite the fall of Rome but that was ten generations from peak to fall, and there were a fair number of major plagues and famines during that period.

These big moves are big reasons why I favor being diversified, and am almost always cautious with reserves. I started trading in the summer of 1987 three months before the crash, so in the back of my mind, I know that these 50 year storms can happen. Gold has shown itself not to be immune. This storm started in gold, and the margin calls in that market helped weaken the stock market.

I am not a fan of fast markets. There is no need to rush in because V-shaped bottoms tend to be rare, and by definition only a very few can buy at the bottom on the V. Many more suffer financial harm, thinking there will be a V, when it is a waterfall decline. So I prefer to wait for the dust to settle, perhaps take a small or partial position with the plan to add more.

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