Pessimistic Sentiment Gives a Buy Signal for Gold

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Includes: CDCAQ, GG, GLD, GOLD, NEM
by: Beacon Asset Managers

We determined that Gold was approaching an "Extreme Pessimism" sentiment buy earlier this month (please see our Aug. 5 Three Beacon Blog) when it hit 39.6 on the Ned Davis Research Gold Bullion Sentiment Poll. Now that it has hit 18.7 on the poll (see chart below), the lowest reading since the sentiment low in 2002, we believe the buy signal has been given.

We are strong believers of sentiment as a tool in helping to time buys and sells correctly. Historically, if one bought Gold at 37.9 or below the annual gain has been 13 percent as compared with buying Gold when sentiment has been above 66.4, which has provided an annual gain of 0 percent.

There are many reasons, both logical and silly, why gold should rise from here. The consensus fundamental driver for a sustained higher gold price continues to be China, the world's biggest gold mining nation, and is replacing India as the world’s largest consumer. It is seeking to boost gold output to 290-tons this year, but this will not meet its growing consumer demand. This supply gap, combined with Chinese desires to move its savings reserves away from the U.S. dollar, could push the yellow metal above the important psychological $1,000 in coming months. Since the start of the Gold uptrend in 2001, this sentiment poll or indicator has proved a valuable timing tool in catching the six low points during its current Bull market. This is the seventh potential signal and yes, it could be “different this time.” However, we will go with the tried and tested indicator until the market tells us otherwise.

Long term we remain positive on gold despite being bullish on equities over the next 12 months. We have recently introduce a 5.6 percent weighting in our model Beacon Master Portfolio, as we are currently taking a cautious investment stance and are alert for short-term speed bumps between late August/early September to late November, and plan to return to a fully equity invested position by December (90 percent versus a current 73 percent).


Disclosure: No current positions, but GLD is a 5.6% weighting in our model portfolio.