The hate mail has just started arriving!
Let me explain why this is a good thing.
‘Wishful thinking!’ says Bill on my call for a rally.
‘You will regret writing your last report indicating Gold has started its big rise,’ emailed Stewart.
And my favorite, ‘I’ll bet you $50 the gold price won’t be at or above US$1900 by June 30th,’ from Luke.
Then back for more the next day, Stewart tells me, ‘Gold stocks are toxic. I am getting out while I can’.
But why do I reckon that suddenly copping all this a good thing?
The reason this is such good news is that extreme vocal bearishness is without doubt the best sign of a market bottom that you’ll ever see.
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Look to the Bear
It’s only at this point of capitulation, when investors start dumping assets and throwing insults, that you can have a genuine turning point in the market.
For example, back in late July 2012, I had a few emails in the Diggers and Drillers inbox that would have made even a hardened miner blush.
The whole resource sector had been falling for 18 months. It was the darkest of days. But only at that point of capitulation for many did the frustration spill over in earnest into emails that needed a parental guidance warning.
At that point, I knew the market had bottomed. A few days later, on the 2nd August I told Diggers and Drillers readers about the emails, saying that:
‘There’s an age-old cycle of market emotions, and the general apathy and low participation in the current market, along with the number of frustrated investors… could tell us we are somewhere around ‘despair’ [in the chart below] right now… If we are there, or close, then the worst could be behind us now.’
And sure enough, the timing of the emails coincided almost exactly with the resource sector hitting rock bottom. I copped it on the 19th July, and the mining sector then bottomed on the 25th July.
Since then it’s rallied 13.8%.
I think of it like this: An asset in uptrend is like a bus; it can only carry so many passengers. When there are too many punters trying to get a free ride, it’s overloaded, so it just won’t go anywhere.
You have to wait for the breaking point, when you’ll get a mass exodus. And only then can the bus resume its journey. Or in other words, only after the depths of frustration – and seller exhaustion – can that asset’s uptrend resume.
This is exactly why the old saying goes: bull markets are born in pessimism.
So, when investors are at record levels of bearishness, it’s yet another stark warning that we are at, or close to, a bottom for gold.
This is true in all markets. And for gold, you can see how well it works in the chart below. At the bottom of the chart, you’ll see the ‘Ned Davis Research gold sentiment daily composite index’ (paid research republished with permission by Tocqueville).
I’ve circled in red the times it’s plunged since 2006 as the market went bearish on gold.
Then, I’ve circled in green the corresponding times in the gold chart in the top half. This is where it gets interesting. You can see that since 2006, when the market goes maximum bearish on gold, it has always preceded a rally that lasted a few months at least, or in some cases more than a year.
Buy Gold When They’re Crying…and Sell When They’re Yelling
Click here to enlarge
So it’s great to see the market so deliciously bearish on gold right now. If this pattern repeats, get ready for a chunky move in gold very soon.
When it Comes to Gold, Don’t Forget the US Fed
We had more fuel for the fire over the weekend. The US Federal Reserve wheeled out its chairman, Dr Ben Bernanke, to deliver a riveting speech at ‘The Annual Monetary/Macroeconomics Conference: The Past and Future of Monetary Policy’.
After recent confusion from the Fed’s messages, Bernanke gave good reason to expect gold to pick up from here:
‘…the expected average of the short-term real rate over the next 10 years has gradually declined to near zero over the past few years, in part reflecting downward revisions in expectations about the pace of the ongoing recovery and, hence, a pushing out of expectations regarding how long nominal short-term rates will remain low.
‘As the persistence of the effects of the crisis have become clearer, the Federal Reserve’s communications have reinforced the expectation that conditions are likely to warrant highly accommodative policy for some time.’
I’ve emphasised those two sections in bold.
The first one is bullish for gold because low rates are generally better for gold. The reason is, historically some investors would rather have the funds in the bank or in bonds when there’s interest to be had, instead of in non-yielding bullion.
The second one is good news too, as ‘highly accommodative for some time’ translates to ‘money printing for some time’ which has so far been very positive for gold.
Dr Alex Cowie
Editor, Diggers & Drillers
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