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Gold: Pet Rock or Unique Opportunity?

Everyone is slamming gold. But you buy when everyone sells. With metals unrealistically priced and record numbers of shorts exposed to a short covering rally, the recent sell off is setting up an extremely interesting buying opportunity.

by Jon Salmon, EVR Bullion Limited (UK)

If anything, interest in precious metals has completely collapsed. This is evidenced by falling trading volumes, but also by the ultra-bearish sentiment currently manifesting itself in prices. With the mainstream media onslaught against precious metals including the Wall Street Journal’s Jason Zweig proclaiming gold “like a pet rock,” describing owning gold as “an act of faith,” try a search on Google or Twitter, you will find consistently negative commentary and opinions.

That type of sentiment is a characteristic of a rock bottom. In fact, our belief is that we are very close to gold’s final bottom.

 

It is also worthwhile noting that the last time ‘everyone’ was slamming gold back in 1999. What happened next? A 650% rise over the next 12 years:

The opposite is true as well. When everyone is euphorically bullish, it is a signal to sell. Take for example 22nd August 2011, one day before gold’s all-time high, Reuters released an article entitled “Banks race to raise gold price forecasts” in which all large financial institutions unanimously increased their gold price forecasts. The euphoric 'consensus' then was that gold could only go higher.

 

The problem is that investors are looking away from precious metals at this point. It is only the contrarian investors that are turning their attention to gold, silver and platinum. The recent sell off is setting up for an extremely unique opportunity to buy as metals are unrealistically priced. So the number of investors that will benefit from this selloff will be, as usual, very small. Why? Because everyone else will be following the crowd.

Gold Market Right Now

We appear to be in the early stages of the final act in this precious metals bear market. Gold breaking below $1,131 has likely confirmed we are in this stage. Gold is extremely oversold on the charts, and with record short positions in the market [now over 108,000 contracts], a short covering bounce from the decline seems like the most probable outcome at this point in time. The last time we were close to this level of shorts, Gold saw a $200 rally.

It is the combination of an extreme oversold condition coupled with strong technical support that creates a very favourable buying opportunity. It is always darkest before dawn and smart investors learn to follow their gut and not the sound bites.

 

This is the perfect environment for shopping with large discounts, something smart investors are waiting for.


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