The February edition of the Scientific American carries an article by Benoit Mandelbrot - under the title of "a Multi-fractal Walk down Wall Street". I had been waiting for it.

Benoit Mandelbrot is a highly regarded mathematician who is the father of multi-fractal geometry which underlies a multitude of the latest high-tech applications - e.g. data compression. You might be asking what multi-fractal mathematics has to do with the stock market, gold, risk management and charts. The answer is, A hell of a lot!

The recent repetitious financial crises have proven the present risk management systems, used by most of the world's financial institutions, are totally unreliable. Consequently, the search continues for a better system. That is where Benoit Mandelbrot comes in. His multi-fractals offer a far more natural analysis of market behavior, by including even the most extreme situations, than the present ones, which conveniently ignore extreme and crises situations.

Multi-fractal implies a market behavior underlying a specific pattern which can be expressed mathematically in fractals - and which inherently has the possibility to repeat it self on different scales of magnitude.

• A fine example is the boomerang which leaves the thrower with a certain revolution, then suddenly speeds up, turns around, flies back and returns to the thrower at the original departure speed. We can say that in the original take-off speed of the boomerang, the later speeding-up factor must already have been embedded.
  
  
• Another example is the tsunami which travels long distances as an average wave, but upon reaching the shore builds up suddenly to many times its original height.
  
  
• Speaker noise can give the same effect when certain low volume patterns suddenly cause a heavy fibrillation.
  
  

Similarly, heretofore quiet market patterns suddenly give rise to peak fluctuations - e.g. when trading volume increases suddenly. Subsequently, sudden price rises must have been already inherently embedded in the original quiet trading pattern.

In short, Mandelbrot's multi-fractals take extreme situations into account and link the future with the past. Something older theories did not do.

I expect that in a relative short period of time the financial establishment will change over to multi-fractal based risk management - which must consequently will necessarily be accompanied by a radical change in investment policies. The derivative markets and especially currency and gold hedging are bound to come under the greatest scrutiny. This will likely result in activity and positions in these markets to be considerably reduced.

That takes me to a speech by John Lutley, reported in the Northern Miner and made at the World Gold Institute meeting last December in New York where Lutley explained gold hedging as a orderly and purely market facilitating action, which in my humble opinion is totally removed from reality and truth as we have been able to witness over the last ten years in the flagrant and unorthodox outsider speculation and interference. Sometimes I wonder what the affiliations of establishments like the World Gold Institute and the World Gold Council really are.

Lastly, we look at "Charting". I also expect charting to become more and more influenced by multi-fractals. With fractals it is completely possible to envision a slow dull and flat gold market, which suddenly flares up with unprecedented activity and price volatility like the boomerang analogy.

January 29, 1999
Lake Chapala, Mexico
Hans Schicht