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When it comes to market sentiment, gold is at the bottom of the barrel as almost everyone is predicting a complete collapse in the gold price and is falling all over each other to predict the new and lowest price for gold. Why is that so? What does it all mean? Read on!
The above comments, and those below, have been edited for the sake of clarity and brevity to provide a fast and easy read and have been excerpted from an article* by Hebba Investments LLC (hebbainvestments.com) which is posted on SeekingAlpha.com under the title Former Gold Bulls Becoming Bears: Does That Mean Gold Has Reached A Bottom? and which can be read in its unabridged form HERE.
Over the past few weeks we have seen so many articles, predictions, and opinions that are extremely bearish on gold that we must be at an all-time sentiment low just like we were at an all-time high in 2011. Not only are financial journalists calling the market, former gold bulls are now turning bearish. Even Martin Armstrong is calling for $800 gold when only five short years ago he was calling for $5000 gold, ironically enough, by the end of 2016.
Investor Sentiment
Investors’ sentiment is established as a result of investors “voting” on what they want to own directly related to their sentiment towards the investment. Whether they justify it with fancy charts and technicals or creative stories, it is almost always biased towards the pessimism or optimism of the investor.
This is especially true in the gold and currency markets where there is no way to concretely measure cash flows – your purchase is fully based on the expectation for appreciation. Thus, for gold investors, sentiment should play a very central role in determining the future price, which is something that all gold investors should have learned from this downturn.
The reason why sentiment is so important is because it gives an insight into the positioning of other investors. This is the whole “sell on the trumpets and buy when blood is in the streets” concept coined by the Rothschild’s over 100 years ago.
- For investments with very measurable fundamentals and cash flows, low sentiment allows for buying future cash flows at a significant discount because everyone is afraid or disgusted with the asset.
- For monetary assets like gold, low sentiment tends to indicate much higher short positions as traders take the other end of a very deep and liquid market.
The strategy works simply because by the time sentiment is public and overly pervasive, investors and traders have already positioned themselves accordingly and are simply talking up their books.
Now let us cover some examples of the bearishness that is all over the gold market, and keep in mind many of these people and banks were predicting exactly the opposite a few years ago. Below are the recent forecasts of the major banks sorted in order of bearishness as compiled by Bron Suchecki:
· Deutsche Bank – fair value $785
· Morgan Stanley – $800 under worst case scenario, $1,190 average for 2015
· Claude Erb – fair value $825, will overshoot on downside to $350
· Bloomberg Survey – $984 average estimate by 31 Dec 2015
· Goldman Sachs – could fall below $1,000
· ABN Amro – $1,000 by 31 Dec 2015 and $800 by 31 Dec 2016
· OCBC – $1,050 by 31 Dec 2015
· Capital Economics – $1,050 by 30 Sep 2015, $1,200 by 31 Dec 2015
· UBS – $1,180 average price over second half of 2015
What is interesting is that in 2012 Deutsche Bank, the most pessimistic of the above bunch, was forecasting a 2013 and 2014 gold price of $2000 and $2200 respectively. For those interested, Bron Suchecki has an excellent graph of historic price predictions.
(click to enlarge)
Source: The Perth Mint
As is obvious, these price predictions seem to pretty much follow the momentum of gold – when the price is rising predictions continue to forecast more of a rise, while during the fall they do just the opposite.
When it comes to market sentiment, gold is at the bottom of the barrel as almost everyone is predicting a complete collapse in the gold price and is falling all over each other to predict the new and lowest price for gold…
What does that mean? Well, the majority of these forecasters calling for lower gold are probably already positioned for it, and the fact that gold interest is rising, suggests that most of these people are not only out of gold, but are shorting gold. It doesn’t mean the gold price cannot fall further as shorts pile on, but at a certain point there will simply be no more fuel for the selling – that’s when you get the bottom and the turnaround…
Gold investors should take some solace in the fact that the same prognosticators calling for the end of gold are the same ones that called for $2000 and $5000 gold when gold was rising – they were dead wrong then and they may be dead wrong now.
Gold has truly become a contrarian trade and we think it’s a no-brainer for long-term investors (i.e. who have horizons greater than one year) to build up positions in:
- physical gold,
- the gold ETF’s and
- miners who have also been hit hard and, as such, when gold finds its footing, could provide a lot of leverage to the gold price.
The next time you read that call for $800 or $500 gold, know that more than likely these same people were calling for $10,000 gold when the price was rising – that is the sentiment game and it is usually better to be on the contrarian end of the trade.
*http://seekingalpha.com/article/3382295-former-gold-bulls-becoming-bears-does-that-mean-gold-has-reached-a-bottom?ifp=0
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