Continued Negativity in Gold Is Bullish

Source: http://www.flickr.com/photos/metal213/

CNBC’s Jackie DeAngelis interviewed Tom Kendall of Credit Suisse on Tuesday. The latter argued that the price of gold would resume its downward trend and sink as low as $1,000 per ounce later this year.

As a contrarian and a gold bull, I find this extremely encouraging. While I believe that the gold price may correct or consolidate for a few weeks, I think the price is going much higher in the coming months and years.

Kendall argues that the price of gold is going up now not because of increased demand but because of short covering, and that therefore the rally won’t last. An improving economy and rising rates will inevitably lead to a lower gold price.

As one would suspect, I would approach this viewpoint with skepticism. First, as I have pointed out, a rise in interest rates has historically corresponded with a rising gold price, as the former reflects a decline in financial assets (e.g. bonds and stocks) and investor demand in gold and other “real things.” Furthermore, a strengthening economy isn’t necessarily bad for the gold price. The global economy improved after the tech bubble burst after the turn of the century (2004-2007), while at the same time the gold price rose.

Second, while Credit Suisse correctly predicted a weak gold price in 2013, investors quickly forget what the firm was saying about the gold price in 2011. In fact, in November 2011, it was reported that Credit Suisse was calling for $2,000-per-ounce gold, and they owned call options reflecting this sentiment.

While investors like to think that they are capable of acting upon contrarianism, the simple fact of the matter is that this is not the case. Most investors get caught up in the hype of whatever sentiment is prevalent at a given time, and this sentiment reflects recent market activity. So when the gold price was reaching record highs in 2011, it was commonly believed that the gold price would reach $2,000 per ounce.

Not only were firms such as Credit Suisse predicting this, but a record number of retail investors believed this as well, given that the largest gold-backed ETF — the SPDR Gold Trust (NYSE:GLD) — held far more gold than it does today, with the yellow metal trading at roughly 70 percent of its 2011 peak. Now the prevailing sentiment points to $1,000-per-ounce gold. People believe that the economy is improving, thata there is no inflation, and that people should own American stocks despite the fact that they are historically overvalued.

Successful investors zig when others are zagging, and this is a major reason investors need to consider owning gold and related equities in this environment. The fact that we are perpetually bombarded with articles and interviews such as the one cited above simply bolsters my conviction.

While I believe that owning gold longer term is a wise decision, I think the price may have gotten a little ahead of itself.  Gold has basically been rising without any correction except for one sharp intraday downward spike on January 6.  This unnerves me a little, and I think investors should wait for a correction of maybe 3-5 percent before entering the market or adding to positions.

Such a downward move will serve to eliminate the speculative money that has entered the market over the past couple of weeks, which has been especially active in the mining shares. As the price falls expect to see more headlines like “Why Gold Is Going Down.” But just remember that from a contrarian perspective such headlines are extremely positive, and they function as “buy” signals rather than “sell” signals for successful investors.

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