Home' Australian Resources and Investment : March 2014 Contents 66 • Australian Resources and Investment • VOLUME 8 NUMBER 1
MarketWatch, quoting Societe Generale
Cross Asset Strategist Patrick Legland,
who claimed, 'Over the long run, gold
still looks overvalued,' although he
didn't state relative to what, or how low
he saw prices going.
As you can see, almost every major
investment bank, asset manager and
market strategist is bearish on the
outlook for precious metals. Late last
year, they were practically lining up to
issue ever more dire predictions for the
future outlook for gold prices.
And it's not just the 'market
professionals', either. At the end of
2013, the broader investing public
loathed precious metals. A stock
and sector sentiment survey run by
Sentiment Trader on 18 December 2013
shows zero per cent bullishness towards
precious metals, captured in the image
on page 65.
That is not a misprint. Literally no-
one was bullish on gold.
Meanwhile, on the futures market,
speculative positioning had never
been more bearish than in late 2013.
Institutional investors, many of whom
had taken a position in gold through the
gold exchange-traded fund (GLD ETF),
had divested hundreds of tonnes across
the course of 2013, with total holdings
back to levels not seen since early 2009.
Is this a good sign for precious
Yes, it is. History would suggest that
the incredibly bearish sentiment from
investment banks and the general
public indicates that the correction
in gold has reached, or has almost
reached, exhaustion point, with a
change of trend not too far away.
And from a contrarian, long-term
investor's perspective, the incredibly
negative sentiment is highly encouraging
because you should buy assets when
no-one else wants to, as they're likely to
be selling at discount.
As Sam Stovall, investment strategist
for Standard and Poor's, once stated:
'If everybody's optimistic, who's left to
buy? If everybody's pessimistic, who's
left to sell?' Everybody is pessimistic on
Indeed, from a contrarian
perspective, gold looks to be as hated
at the start of 2014 as nancial stocks
did at the start of 2009, or the Japanese
equity market in the middle of 2012.
We all know what's happened to
share prices in the nancial sector since
2009, while the Nikkei was the best-
performing major stock market on the
planet in 2013.
The fundamentals also support
higher gold prices
At ABC Bullion, we remain convinced
that the primary bull market for
precious metals is still in place. None
of the problems that caused the global
nancial crisis (GFC) have been solved;
in many cases, they are worse.
Economic growth levels are still
historically weak, while unemployment
and underemployment rates
(particularly youth unemployment) are
at crisis levels. In the United States,
nearly 50 million Americans are on food
stamps or disability insurance.
Meanwhile, debt levels around
the world, which were already at
unprecedented highs pre-GFC,
have continued rising. Indeed, the
International Monetary Fund (IMF)
recently warned, 'As debt levels reach
a 200-year high, much of the Western
world will require defaults, a savings tax
and higher in ation.'
While those drastic measures
recommended by the IMF may well be
what is required to set society on the way
to a genuine economic recovery, it will
be a painful process going through said
defaults and higher rates of in ation.
On top of the elevated levels of risk
in the global economy mentioned above,
all of which will help drive demand for
bullion in the years ahead -- we also
have continued voracious demand for
physical gold in emerging markets,
Via the regular importation of
well over 100 tonnes a month of gold
through Hong Kong, China is now
consuming roughly half of all the new
gold that is mined each year.
Any objective assessment of the
economic landscape in both the developed
and emerging world would come to
the conclusion that the fundamentals
supporting higher prices for physical gold
are stronger than ever. Rather than the
2013 price fall marking the end of the
gold bull market, it has instead provided a
historic buying opportunity.
What we have witnessed in the last
two years since gold hit US$1900 is in
all likelihood just a mid-cycle correction,
similar to that which took place between
1974 and 1976, where gold prices fell from
just below US$200 to just over US$100.
As you can see from the chart,
following the nearly two-year price
correction of roughly 45 per cent,
returns were explosive, with prices
rising from US$100 to over US$800.
A similar move today, which would
again be roughly following a two-year
price correction of 40 per cent, would
see prices head well north of US$6000
in the coming years, giving investors
What we have witnessed in the last
two years since gold hit US$1900
is in all likelihood just a mid-cycle
correction, similar to that which
took place between 1974 and 1976,
where gold prices fell from just
below US$200 to just over US$100
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