Jeff Clark, Senior Precious Metals Analyst, GoldSilver
JUL 23, 2018
Have you ever looked at a chart of an investment and wished you’d bought when it was cheap, before it rose by multiples in price? We all have. But to do that requires we buy when the investment is out of favor, in direct contrast to the prevailing sentiment at the time.
That’s precisely what contrarian investors do. They look for opportunities the majority of investors ignore. It’s how they make big money. It’s how they change their tax bracket. And unless you inherit a lot of money or invent a must-have product, contrarian investing is probably your best shot at becoming wealthy. Saving an extra $50/month isn’t gonna get you there.
The catch today is, looking around the investment world, what would qualify as a contrarian investment? Where is the opportunity to invest in an asset that is both deeply undervalued and likely to return a multiple of our initial investment?
I’m sure you’d agree that common stocks don’t qualify. Nor most real estate. Nor bonds or cannabis stocks or artwork.
There’s only one major asset class that realistically qualifies as a contrarian investment today. Let’s see if you agree…
To qualify as a contrarian investment, investor interest in that asset must be low. Ideally, they out-and-out laugh with scorn and derision at its very mention (or at least ignore it). Sentiment must be low, and buyers must be scarce. Volatility and volume also tend be low. Last and most importantly, prices must be cheap compared to other assets.
The only assets that currently meet these qualifications are gold and silver. As one article I read put it, “…gold and silver prices are deflated by upbeat trader and investor attitudes [primarily about stocks and bonds] in the world marketplace.”
Let’s take a look at a graphical representation of how gold and silver are the ideal contrarian investments today.
First, interest is low, as evidenced by Google searches.
The number of investors that Google the words ‘buy gold’ is at an 11-year low.
Actual buying activity is low.
Average annual sales of US Mint gold coins is at an 11-year low.
Further, gold is so widely ignored in the financial marketplace that its volatility is near decade lows.
Another good measure of sentiment is whether gold is selling at a premium or a discount to its net asset value at popular closed-end funds, in this case the Sprott Physical Gold Trust (PHYS).
The fund is trading at a price that’s lower than the value of the gold it holds. (By the way, be careful buying a closed-end fund; they’re not necessarily designed to track the gold price automatically but trade more on sentiment. Besides, owning the real thing has many advantages paper gold doesn’t.)
The gold price itself, when compared to the S&P, is near an extreme low.
Keep in mind that the gold price, as I write, is 35% below its 2011 peak; silver a whopping 68%. Prices are cheap.
Add it all up and you’ll find that prices are low, sentiment is low, interest is low, and buying activity is low. Gold and silver definitely qualify as a contrarian investment today.
Ideally, as a contrarian investor, you don’t want just a cheap and out-of-favor investment. You’d prefer some indication of potential catalysts. Here are a couple recent headlines that point to the contrarian opportunity in gold…
Gold Stocks: Many traders believe that gold equities act as a leading indicator of the gold price. To whatever extent they’re right, it’s noteworthy that over 80 million shares (over $1.8 billion) traded last week at the Direxion Daily Gold Miners Bull 3X Shares (NUGT). This is the largest volume the fund has ever seen. Gold stocks have now outperformed gold the past 6 weeks.
Mainstream Interest: In a Bank of America Merrill Lynch survey, the percentage of fund managers that said gold may be “too cheap” reached its highest reading ever. Interestingly, more than half said the most crowded trade was the FAANG stocks (Facebook, Apple, Amazon, Netflix and Google parent Alphabet). In the perfect contrarian statement, the analysts said that investors who want to “take the opposite view of the prevailing market trend should buy gold and sell tech shares.”
The behavior of these investors signals they are taking advantage of the contrarian opportunity in the gold market.
Of course, the biggest reason to buy gold is because the financial system today is extremely fragile, as Mike Maloney shows with his new Market Fragility Index. Monetary and fiscal excesses have consequences. The short term may be up for debate, but the long term is inevitable.
The bottom line is that…
Contrarian investors cannot ignore the opportunity in gold and silver right now. As my colleague Alexander Trigaux recently wrote, “world-beating investments are made with sweaty palms, gritted teeth, and through a serious twinge of crippling nausea.” To obtain life-changing profit requires you to act in direct opposition to your emotions. Any negative feeling you have about gold and silver right now is actually a contrarian signal to buy.
Remember, buying a cheap and out-of-favor asset is what opens up the door to potentially earning 10 times your money. It’s hard to ignore the message behind all the data in that report.