July 6, 2022

Top Financial Advisors Negative On Gold As Perfect Contrarian Storm Brews

The outlook for gold has turned profoundly negative.  With prices down over 4% since the start of the year, gold is off to the worst start since 2001.  Billionaire investors George Soros and Louis Moore Bacon have dramatically slashed their gold holdings and Bloomberg reports that money managers have liquidated gold and precious metal holdings for six straight weeks, the longest stretch of outflows since the first quarter of 2011.

Further confirmation of the bearish outlook on gold investment was provided by Barron’s latest survey of America’s top financial advisors who manage money for the ultra wealthy.  According to Barron’s, the “one clear theme” of the advisors for 2013 is an increased commitment to stocks,  logically implying that most advisors see a better economy and rising corporate profits.  With bond yields reaching all time lows, stock dividends are also able to provide income starved investors with yields unattainable from government debt securities or gold.

Barron’s surveyed the best financial advisors in fifty states and the District of Columbia and listed their latest recommendations.  Out of the 51 financial advisors interviewed, only two gave a lukewarm recommendation for gold as a hedge.

With the investor outlook for gold about as negative as it can get, a contrarian opportunity is developing.  A negative consensus by itself is not sufficient to justify an overallocation to gold nor can it provide the timing for a reversal.  Negative sentiment and corresponding price declines provide the opportunity to assess the validity of the consensus and weigh the opportunity for out-sized gains when the consensus swings in the opposite direction.

The probability for a sentiment reversal on gold is not unreasonable.

Severely dysfunctional governments worldwide have abdicated responsibility for implementing policies that would lead to sound fundamental economic growth and fiscal restraint.  In their stead, responsibility for running world economies has been delegated to central banks which have virtually zero constraints on providing easy money as the solution for over indebtedness and slow growth.

The consensus belief is that the benefit of unlimited cheap money, which is clearly stimulating current asset inflation, will eventually benefit the real economy.  This beautiful theory of wealth creation by central banks becomes even more appealing as central bankers assure us that easy money policies will not cause high inflation since monetary policies could quickly be adjusted if inflation rises too high.  After putting the world on a path to permanent prosperity and ending poverty through unlimited money printing, perhaps the world’s central banks will also come up with a cure for cancer – we shall see.  In the meantime, the contrarian case for investing in gold grows with each passing day.

Bearish Outlook On Gold Signals Buying Opportunity

Despite the fact that gold has outperformed virtually every other asset class for the past decade, the September correction in gold prices has caused market sentiment to turn decidedly bearish.  As measured by the London closing fix price, gold reached an all time high of $1,895 on September 5th.   Within the next three weeks, gold had plunged by almost $300 per ounce, closing at $1,598 on September 26th.

Did September mark a turning point in the decade long gold rally, as many have suggested, or is it a buying opportunity?  A review of the factors contributing to the September sell off suggest that from a contrarian and fundamental point of view, the groundwork is being laid for a move to new highs in gold.

Extreme volatility in global equity markets due to the European debt crisis resulted in losses and subsequent margin calls for many leveraged investors who indiscriminately liquidated whatever they owned, including gold investments.

In mid November, SEC documents disclosed that Paulson & Co., the hedge fund run by legendary investor John Paulson had liquidated 11.2 million shares of the SPDR Gold Trust (GLD) during the quarter ending September 30th.  Paulson’s exact motives in selling the GLD remain unknown, but is was reported that huge losses in his hedge funds had resulted in the forced selling of SPDR Gold Trust shares.

Besides helping to drive down the price of gold, investors may view Paulson’s large sale as a bearish signal from an investor who has an incredibly successful long term track record.  Paulson, however, still remains the largest shareholder in the SPDR Gold Trust with a position of 20.3 million shares at September 30th.  In addition, Paulson reportedly remains long term bullish on gold and may have large positions in physical gold through allocated bullion accounts.

In addition to the factors mentioned above, gold may simply have gotten ahead of the fundamentals.  Every long term bull market experiences episodes of sharp price corrections and consolidation.  Over the past decade, with a brief exception in 2008, gold has found solid support at the 200 day moving average.  In April 2009, July 2010 and February 2011, gold experienced a sustained multi-month rally after correcting down to the 200 day moving average.  Currently, a retreat to the 200 day moving average would bring gold down to the $1,600 level.

 

Gold - courtesy stockcharts.com

Mark Hulbert, of the Hulbert Gold Newsletter, who tracks investor sentiment on gold says that the bearish sentiment on gold is reaching extreme levels.  Hulbert says “According to contrarian analysis, this is building a strong foundation for a fresh assault on gold’s recent all-time high above $1,900 an ounce.  This doesn’t guarantee that gold will rise from here, of course, or that it will do so right away. But it does mean that contrarian analysis is currently on the side of the bulls”.

Patient long term investors in gold have been well rewarded.  Despite the September correction, gold prices have advanced by $364 per ounce in 2011, for a gain of 26%.