Commodities & Metals

The Gold Contrarian Bet, As Gold Bugs and Paulson Get Slaughtered

What happens when everyone hates an investment or when everyone likes an investment? A contrarian investor would say it is time to go the other way. Gold has gone from shinola to you know what in 2013. It seems like everyone hates gold or doesn’t want to hear about it anymore. A contrarian might start thinking differently.

So, what is happening so badly in gold? The latest trends from the World Gold Council seem to not offer any great outlook. News came out late this last week that hedge fund manager and billionaire John Paulson has told customers that he would not be buying more gold.

Paulson got rich betting heavily against mortgages and the housing market, when many people just couldn’t get enough of the housing market. He took a very contrarian angle, and this is a bit ironic that such an iconic contrarian might end up being a contrarian indicator at the same time.

Take the case of the Market Vectors Gold Miners ETF (NYSE: GDX). The chart appears to be at a five-year low after peaking in 2011. This ETF is on the miners rather than gold itself, but it signals peak selling in the entire group of those who go out and mine that gold for the world. This ETF is down by two-thirds from its peak. It is hard to believe, but the miners are now close to challenging their panic-selling troughs from late in 2008 and early in 2009.

Then the SPDR Gold Shares (NYSE: GLD) is not at 5-year lows. In fact, it is still up about 50% from its lows even if it has lost one-third of its value from the 2011 peak. This ETF, or trust, is still close to 10.23 million shares in Paulson Management’s portfolio. The value of this entire trust was $34.3 billion based upon holding 856.71 tonnes of gold.

The reality is that most people who are telling you to still buy gold are doing it because of the fundamental reasons or based upon charts. Central banks are printing endless money. Interest rates are super low. Currencies have lower intrinsic value. Strong chart support is within 5% of the current price. And on and on.

We are not telling you to buy gold, but a true contrarian would be keeping his or her eyes open on the hunt.