Thoughts on gold… Jim Grant, Mish Shedlock, Paul Price, Dana Lyons, and my own.
“Terrifically vexing but a wonderful opportunity”
Is it time to consider investing in gold as a contrarian play?
I think so. Reasons: (1) its performance has been horrible and at some point the bleeding will stop. Don't overgeneralize this reasoning, not all bleeding stops. (2) Gold has inherent value as a precious metal and as an "investiment in monetary and financial disorder" as Jim Grant calls it. (It's not a hedge — we've argued this before, see Market Shadows' Hidden Dangers in Gold.)
Grant maintains that gold is “terrifically vexing but a wonderful opportunity." If you're not invested in gold now, it's not so vexing. You can probably make a less emotional evaluation having avoided the recent downturn with you own money.
Jim Grant discusses why he's bullish on gold in this video:
“Gold is an investment in monetary and financial disorder – not a hedge. You look around the world and you see exchange rates are properly disorderly, when you look around the world of lending and borrowing — we are in a regime of price control by another name, so-called zero percent rates and quantitative easing by the world central banks – we are in one of the most radical periods of monetary experimentation in the annals of money… You want to have exposure to the reciprocal asset of the paper assets that are the most popular – so gold, to me, is now the conjunction of price, value and sentiment, and I am very bullish indeed." ~ James Grant
Mish Shedlock, a long-time investor in gold, is also quite bullish:
Hedge Funds Net-Short Gold First Time in History; Contrarian Views
After being net long all the way from $1900 to $1100, Bloomberg reports Hedge Funds Are Holding First-Ever Gold Net-Short Position.
Hedge funds are holding the first ever bet on a decline in gold prices since the U.S. government started collecting the data in 2006.
The funds and other speculators shifted to a net-short position of 11,345 contracts in New York futures and options in the week ended July 21, according to figures from the U.S. Commodity Futures Trading Commission.
Gold futures on Friday fell to the lowest since 2010 on the Comex, and the short wagers show investors expect the rout to deepen.
Goldman Sachs Group Inc.’s Jeffrey Currie says the worst is yet to come for gold, and that prices could fall below $1,000 an ounce for the first time since 2009. “The risks are clearly skewed to the downside,” Currie, the bank’s New York-based head of commodities research, said in a phone interview Tuesday.
Currie isn’t alone in predicting more declines. ABN Amro Bank NV’s Georgette Boele and Robin Bhar of Societe Generale AG say bullion will approach $1,000 by December.
Contrarian Views
From a contrarian point of view, this sure seems like good news to me.
Also, my friend Pater Tenebrarum at the Acting Man blog pinged me with this thought: "Yesterday, the entire gold futures curve out to December traded in backwardation to cash. This is never supposed to happen in gold, and is a sign that physical demand is far stronger than futures prices would indicate."
Strong negative sentiment is a prerequisite for a strong rally. It would be far worse if everyone was bullish during this decline.
However, and as I have noted before, sentiment is not a timing issue. And to answer reader questions in advance, I am still holding. If I were to do anything here it would be to add. I still like the long-term prospects.
Dana Lyons is not as bullish. Read:
It May Finally Be Time To Buy Gold…With An Asterisk
It’s been a rough stretch for gold, to say the least. After being the star asset class of the previous decade, the last few years have not been kind to the precious metal, or equities based on it. After running straight up for 10 years, we probably should not be surprised to witness a counter-cycle move. But in the midst, a trend it will very often surprise people by going much further than they expect. So it has been with the downturn in the gold complex. Gold stocks, in particular have gotten hit especially hard. The Gold/Silver Index and the Gold Bug Index actually broke their 2008 lows and are now at 13-year lows. The popular Gold Miners ETF, GDX, just traded at an all-time low since its inception in 2006.
And what about the commodity itself? After nearly 4 years of relentless selling, is it finally time to buy gold? Well, sentiment is certainly about as dour as it gets. That is a plus. So is the fact that the “smart money” commercial hedgers in gold futures are about as net-long as they have been since the gold bull market began in 2001. Those factors are not by themselves catalysts, however. We’ve said before that in terms of buying a “falling knife”, we would only consider it in the event that prices were hitting the most major of support, in our analysis. And in the most commonly quoted price of gold in U.S. Dollar terms, we don’t necessarily see that yet here. In fact, it has recently broken a major line of support, in our view.
Dana Lyons points out that gold looks better priced in Euros.
This post touches on a number of lessons. For one, if you are going to try to catch a falling knife, golden or otherwise, only attempt to do so at the most major of long-term price support. Secondly, sometimes when a market appears to provide little or no opportunity, perhaps a different perspective can change that. In this case, pricing gold in Euros instead of Dollars puts it at a potentially key support level, as opposed to squarely in the midst of a break down. And lastly, never, ever buy gold…just kidding. After years of pain, gold bugs may finally be getting an attractive opportunity to buy the metal – it just needs to be priced in the right terms.
Even Paul Price (Hidden Dangers in Gold) is finding opportunities in the metal. I think it's time to start looking.
