2 Reasons To Love Gold Again
In this article I’ll bridge these two ideas and reveal a powerful contrarian buy signal that’s flashing right now.
Now, without boring you with a discussion on the science behind behavioral investing, suffice it to say some of the most lucrative opportunities found in financial markets are out-of-favor plays that are unpopular with the crowd.
A week ago, I pointed out mutual fund giant Vanguard was throwing in the towel on gold. The king of index investing had a fund tracking precious metals and mining stocks, up until recently. But with gold prices down 9% so far this year, and mining stocks plunging 11.5%, Vanguard decided to pull the plug.
This is clearly a sign of the times for contrarian investors.
Vanguard, in all its wisdom, decided to dump over $1 billion in precious metal mining stocks AFTER the sector dropped over 10%.
Brilliant. This wrong-way move likely marks a bottom for mining shares.
Also last week, I briefed you about how the market for U.S. Treasuries is likewise giving us a contrarian buy signal in bonds. The rationale here is both simple and timeless.
In this case, net short positions by big speculators in U.S. Treasury notes hit an all-time record. Never have investors been more bearish on bond prices.
The perfect contrarian buy signal!
And now we’re getting the exact type of sentiment signal from gold. Take a look at the chart below.
Source: Bloomberg, U.S. Global Investors
As you can see, speculative short positions for gold futures have hit an all-time high recently. In fact, the “smart money” is shorter now than when gold prices bottomed in 2015.
And if you take a closer look at the chart above you’ll see how good their timing is.
Speculators had the fewest short positions in gold right at the top in 2011.
And it’s not just the big hedge fund crowd that’s heading the wrong way with gold, either. Retail investors are also losing faith in the yellow stuff, as you can see below.
Last week was the fourth straight week of commodity ETF outflows, led by precious metals ETFs, which had outflows of nearly $900 million over the past two weeks alone.
That’s extreme selling.
And like the big hedge fund speculators, small retail investors also tend to have bad timing.
The last time gold ETF outflows were even close to this much in such a short time frame was mid-2017.
Gold prices bottomed in July and went on a tear to the upside, gaining nearly 12% in just two months!
For my money, gold is at or very near a bottom and we have double-barreled contrarian buy signals on the yellow metal.
The easiest way to play the next rally is with the SPDR Gold Trust ETF (GLD), the largest fund tracking physical gold.
For even more upside potential, consider the VanEck Vectors Gold Miners ETF (GDX), which tracks an index of large-cap precious metal mining stocks.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch