If you’re a longtime reader, then you know what I look for in a great trade…
I want to buy what’s cheap, hated, and in the start of an uptrend.
This strategy works in just about every type of asset…
The most important question to answer is, “How do you define these terms for different assets?”
For example, how do you know that gold is hated?
Defining “hated” is tough – as you are defining an emotional state, not a high or low number.
So today, I’ll explain my favorite way to measure sentiment, and why I like to use it. And I’ll show you what it’s telling us about the outlook for gold today…
Some folks like to define “hated” by using surveys of investors…
And that works. For example, in the latest Bank of America Merrill Lynch Fund Manager Survey, gold sentiment hit a 17-year low among investors surveyed.
A result like that shows us investors are pessimistic about gold. (After all, that’s what they’re saying.)
However, it’s what investors are doing that matters most.
So surveys are good… But I prefer to look at “real money” on the line.
The best way to see what the real money is doing in gold is to look at what large speculators in the futures markets are doing with their money. For that, I look at the Commitment of Traders (“COT”) report. It shows the real-money bets of futures traders.
Importantly, when these speculators are crowded at one side of a trade, the opposite tends to happen.
Most people simply look at the size of large-speculator bets. But I take it a little further…
I look at a ratio of large-speculator bets versus all bets. Doing this somewhat “normalizes” history. You can measure today’s bets against a longer time frame – for example, if you wanted to compare what’s happening today with what happened 20 years ago.
When you use this ratio with gold, an important detail emerges today…
Currently, large speculators in gold futures have bigger bets against the gold price (relative to all futures bets on gold) than at any time since 2001.
Take a look…
As someone looking for hated assets, this chart is EXACTLY what I want to see.
It shows gold speculators are betting against gold to a greater degree than at any time since 2001.
That’s important… Gold’s last great bull market started in 2001, from a similar degree of “hated.”
Back then – the last time gold was this hated – the major gold-stock index (the HUI Gold BUGS Index) soared nearly 300% in a little more than two years.
I realize nobody is talking about gold or gold stocks today. But that’s what you want…
In order to buy an asset at the best price, you want to buy it when it’s hated and ignored. And you want to sell it when it’s all over the news.
Today, gold is hated. That’s what the real-money bets are saying now.
We don’t have our uptrend just yet. However…
I expect today’s gold extreme means that we are close to the start of the next great bull market in gold.
Good investing,
Steve
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Source: Daily Wealth