The Contrarian Call on Gold
Source: Jordan Roy-Byrne, The Daily Gold (10/14/10)
"Traders and investors need to prepare both mentally and financially for an accelerating market."
However, there is much more to contrarian investing than simply going against the herd or prevailing trend. First, the herd is actually right most of the time. As a bull market develops, more and more people come on board. Sentiment will inevitably become more bullish as time goes on. Furthermore, an investor should also consider technicals, fundamentals and value in their contrarian approach.
Fake, fraudulent and imposter contrarians (who neglect true contrarian analysis) think gold is a bubble and will soon decline. They see this simply because gold has gone up too far and too fast. Meanwhile, others see gold in a bull market but continue to be worried about a 2008-style setback.
As contrarians, we have to evaluate sentiment, technicals and fundamentals. The fundamentals here are certainly obvious. Sentiment, as we stated, is long-term bullish but not hyper-bullish at the present time. Most investors don't own gold nor precious metals shares. This fact, along with the technical picture lead us to believe gold is getting ready to accelerate into 2011 and this will catch most by surprise.
From 2001–2005, gold stayed within channel lines 1 and 2. After bumping up against 2 several times from 2003–2005, gold accelerated above 2 in late 2005. Similar action occurred from 2008–2010, when the market, after several tries, broke above 3, while 4 is only slight resistance.
In addition to the channel line, we note in the lower rows the 20- and 40-week standard deviations. This is how far the market is from those levels and shows the market is not even close to overbought on a long-term basis. Thus, the market has even more room to rise over the next few quarters. Going forward, we have strong targets at $1,500, $2,100 and $2,300.
What is another way to tell if a market is nearing acceleration? Check the length of recent corrections and consolidations, which a more important than the depth. A market that is gaining strength will experience shorter and shorter corrections. Notice how the duration of each correction has become smaller and smaller? Gold has yet to surge as it did in late 2005 and late 2007 but has continued to rise steadily since late 2008, while actually gaining strength.
We are 10 years into this bull market, so naturally we should be seeing more and more people pile on board, creating acceleration and bigger gains. The current technical and sentiment picture are in position for this to happen over the next 12–18 months. Yet, most aren't thinking about this. Certainly, there can be small corrections along the way and, perhaps, one last big correction several years down the road before a final blowoff.
For the time being, traders and investors need to prepare both mentally and financially for an accelerating market. We see this possibility and are coaching our subscribers on positioning to take advantage of this, while at the same time managing risk. If you'd like professional guidance to help you navigate this potentially rewarding bull market, we invite you to consider a free 14-day trial to our service.