Gold is hot – should you buy?

Gold is hot – should you buy?

As long time readers will know, I just love going against the crowd – but only when the time is right! I realise many non-professional traders consider themselves contrarians – but are they? Since a large portion of them lose money (the stats on spread betters backs this up), they have obviously not developed a contrarian method that works for them.

Most of us believe we are a special and unique kind of trader, un-influenced by mere emotion. We can rationally approach a market and arrive at a logical conclusion, can’t we? That, of course, is far from the truth! Most of us herd and follow the crowd that appeals most to our sub-conscious biases.

To be a successful trader, you must wean yourself off this tendency and one of the most useful means I have for testing whether a market has gone too far is to glean the state of sentiment as displayed in the MSM.

Gold (and silver) have been on fire in recent days – and the miners likewise. You had to be a recent visitor from Mars not to notice the blanket coverage that gold in particular has been getting. And every single one I read has been urging us to buy, baby, buy.

Why? Because the world is coming to an end! Bonds have massively inverted by the greatest degree in history! The Fed cut rates for the first time in eight years! The Dow lost 1,000 pts in three days! The US/China trade war has ramped up! China and Russia are buying gold big-time! And Ray Dalio says gold will be a ‘top investment during the coming paradigm shift’.

And here is a typical headline I saw recently: Gold and Silver broke through six-year base, mining shares present great values. And forecasts of $2,000 are now common.

Wow! It’s a no-brainer, surely? You would be mad not to load up. Yes, and that is my problem with that argument. And in fact, bullish sentiment has been so forceful it reached a nosebleed DSI reading of 95% on two connecting days this week.

But should we, in contrarian fashion, just jump in and short? Of course not – without some backup evidence from the charts. And that is not forthcoming as yet. But that day may not be too far away.

Here is the big picture

When the market broke above my blue trendline in June at $1350, that was my signal to turn bullish and project a first target at the Fibonacci 50% resistance at around $1485 which has now been achieved. This week’s high was $1510.

Of course, a more attractive target is the Fibonacci 62% which lies at the $1590 area, since the 62% retrace is the more common. But with the market way over-bought, I believe that target can only be reached if a decent dip occurs first to shake out the bullish excess.

As one measure of extreme bullish sentiment, here is the latest COT picture

Last week alone, hedge funds increased their longs by a whopping 15% to stand at a lop-sided 7/1 long/short. And the small trader went the same way.

We know that specs always are maximum bullish at market turns – that’s what drives the price to the high after all. But when the tide turns, this lop-sided bias turns against the bulls and the declines will be savage. I will be waiting!

The bond market has gone really nuts this time

I have written here many times of the crazy state of fixed income with all of the German sovereign bonds now at negative interest. You can buy their bonds and they charge you money for the privilege. Nice work if you can get it.

Then take a look at this chart of the Austrian 100-yr bond

Remember, central banks are now issuing bonds of super-long duration whereas previously, 30 yr (or even 50-yrs) were the longest maturities. The chart shows that this year, their 100-yr bond has increased in value by a super-charged 70%. In fact, it has been performing more like a hot fake meat IPO than a staid sovereign bond!

That’s what I call a rabid yield grab. Of course, this is totally unsustainable and I am looking for a bottom in global yields fairly soon.

Just as in the manic gold market where DSI bulls have reached record levels, so have the bulls cohort in US T-Bonds. Latest readings show a DSI bulls reading of 98%! It has only been higher at one point in history – just before the start of the historic huge bond wipe-out in 2008 that started the Credit Crunch.

Let’s get this straight – only two professional advisors in a hundred are either bearish or neutral. So does it make sense to stay bullish when the ship is about to capsize?

Only two (max) advisors are in the other side of the boat – and are riding way above the water level in relative safety. The other 98 are sinking!

The vast majority of traders believe rates can only go lower. I have even seen serious forecasts that even US Treasuries will go negative, just as most of EZ bonds have done. While I discount that extreme vision, if US Treasury yields do move towards zero, it will create sheer panic in stocks as deflation will be seen to become a reality – and set up a recession/depression.

So is this is the perfect time to become a contrarian on bonds? If not now, then soon.

Sterling takes a ‘no-deal’ beating

I have been a little early in trading GBP/USD long as it has continued its strong decline. For perspective, here is the multi-year weekly

What a sorry story!  From the 2.11 high in 2007 – just before the Credit Crunch – it  embarked on a bear trend to the 2016 Brexit low at 1.18.  And last week, it lies only 2 cents above that low.  Will it break it?

One of the factors behind sterling’s long term slide is the UK’s sluggish economic growth, despite the huge immigration in recent years.  And our balance of payments has always been huge – the effect of living outside our means.

The recent collapse is the result of increased negative sentiment. Last week, the Q2 GBP data contracted for the first decline in seven years.  And the new Johnson administration is brutally reversing the supine May approach to Brexit by talking up the ‘no-deal’ scenario on 31 October. Whether this scares the EU into submission is a moot point.

Will Johnson’s Halloween trick or treat ploy work on the EU on that most appropriate exit date?  Will it be trick or treat?

From a trading standpoint, I am unable to see a reversal yet.  But there are ten weeks until Halloween – and even one week is a long time in politics.

Of course, one of the benefits of a weaker currency is that exports are boosted – at least in theory.  Vehicles account for 12% of UK exports – but these are mostly aimed at the EU who may well apply swingeing tariffs post Brexit.  The outlook is not bright in the auto trade.

So perhaps the main effect of a weaker exchange rate is that we will take more domestic holidays!  At some money changers at airports, already the euro rate is at parity or worse!

Incidentally, I have had a very long-term prediction that sterling would approach parity with the dollar (with no time estimate).


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