The over-whelming wave of negative sentiment has not been completely unjustified, as managers and other large speculators recently decreased net-long positions in gold contracts and options by 40 percent, the most in more than five years. However, when everyone is on the same side of the boat, it is usually best to run towards the other side. This contrarian line of thinking applies to many kinds of assets, especially gold.
Gold’s recent pullback is not the first correction it has seen in its historic bull run. At the beginning of the financial crisis in 2008, gold fell from $1,000 to $700 per ounce, while silver plunged from $21 to $9 per ounce. In 2006, gold stumbled from $725 to $570 per ounce and silver fell from $15 to $10 per ounce. In both cases it took the precious metals more than a year to fully recover, but the sell-off provided buying opportunities for patient investors seeking to diversify their portfolio with a no counter-party risk hard asset.
In the immediate short-term, a contrarian stance on gold has already been successful. Gold has bounced from last week’s low of $1,569 an ounce to climb back around $1,600. On Tuesday, the precious metal logged its best day of the year, as Ben Bernanke delivered the Semiannual Monetary Policy Report to Congress.