“Gold Investors ‘Give Up Hope’ as Biggest Short in History Builds,” Bloomberg news reported yesterday…
The first sentence in the article was, “Gold is hitting new milestones of misery.”
I LOVE to see this…
Gold is HATED! So, is it time to buy?
Today, I’ll explain how to spot the best time to buy when an asset is hitting a sentiment extreme… And we’ll see if gold meets that “buy” standard today.
First, what does it mean to be a contrarian investor?
Being a contrarian investor does NOT mean you always do the opposite of what “the crowd” is doing – at least, not if you want to make money. Always going against the crowd doesn’t work.
Instead, before you can even consider going against the crowd, you have to wait for the crowd to reach an extreme position.
“The crowd is wrong at extremes, and right in between,” they say.
I don’t know where this phrase comes from… But I heard it more than 25 years ago, when I first became an investment professional. And it’s proven to be right countless times. It is the main rule of contrarian investing.
So as a contrarian investor, I look for sentiment extremes first.
Once I see the crowd is at an extreme, though, I don’t immediately act. Instead, I wait…
I don’t just buy BECAUSE something is extremely hated.
I did that early in my career, and I got burned. Investments that seemed extremely hated would fool me. They would go on to be even more hated… And I would lose money. So I started doing something different.
Now, I wait for confirmation on my idea. I look for the trend. If something reaches the point where it’s hated, I wait for the uptrend before going in.
Yes, I know… I will never get credit for calling the bottom to the day. And yes, I will miss out on the first few percentage-point gains off the bottom. But I won’t get stuck on a sinking ship.
Getting back to gold… let’s see if it fits my “buy” standard today.
“Exchange-traded funds tracking the metal have bled assets for 13 consecutive weeks… [and] investors have placed the biggest gold short on record,” Bloomberg reported yesterday.
The article quoted precious metals analyst David Govett on why investors are giving up on gold exchange-traded funds (“ETFs”)…
The long suffering holders of [gold] ETFs have finally given up hope of the yellow metal returning to its former glories and have decided there is better protection in the dollar, the stock market, and pretty much anything other than gold.
If you are a contrarian, this might look like the moment you’ve been waiting for… Gold is extremely hated.
Except, my friend, we don’t have the start of an uptrend yet. So I can’t go in and buy like I want to – yet.
The bottom could be here today… Or gold could get even more hated. We won’t know until the uptrend returns.
By not buying today, could I miss out on getting in at the bottom? Yes. But I am OK with that.
Gold is incredibly hated. It is at the point that contrarians love. When extreme moves like this are exhausted on the downside, huge gains can follow on the upside.
To take advantage of it with less risk, wait for the uptrend, and then buy. We are not there yet.
Good investing,
Steve
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Source: Daily Wealth