Pessimism on gold is so extreme that sometimes even the bears worry it might be overdone. Today the price jumped a little more than 1 percent after news hit the wires that was perceived to be bullish: Moody’s Investors Service reported that U.S. policymakers must do something about the government debt to avoid a rating downgrade this year.
Contrarians see today’s bearishness as a bullish sign, reasoning that once almost everyone who used to be a bull has become a bear, gold has nowhere left to go but up. That’s why they’re called contrarians. It’s also what happened in November 2008, says Dave Lutz, a precious-metals analyst at Stifel, Nicolaus in Baltimore. As negative sentiment peaked, gold began a rally that took it from $800 an ounce to more than $1,800.
As of May 14, futures investors were the most bearish they’ve been since 2008, according to data released late last week by the Commodity Futures Trading Commission, the government agency that oversees the market. Noncommercial interests, such as hedge funds and mutual funds, held just nine long futures contracts for every five short futures contracts on the Commodity Exchange in New York last week, the CFTC said. Their net long position of about 84,000 contracts was down from more than 200,000 last fall. In November 2008, the long position got as low as 64,000 contracts (each of which represents 100 ounces of gold).
In ordinary times, the vast majority of noncommercial interests are “long” gold, meaning they benefit from a price rise. Commercial interests such as gold miners, meanwhile, are net “short,” to hedge their risk; if they receive less for the gold they pull out of the ground, they can offset the losses by gains in the futures market. For the futures market as a whole, the number of long contracts exactly equals the number of short contracts.
Billionaire George Soros sold gold holdings last quarter, and Goldman Sachs predicted more declines after the longest slump for gold in four years, Bloomberg reported today. It quoted John Stephenson, a senior vice president and fund manager at First Asset Investment Management in Toronto, who said, “It’s had a 12-year run, but the whole fear-mongering that the world is going to end is just not working. So I think that any last vestige of an investment thesis for gold has been stripped.”
Gold’s jump occurred today after Bloomberg reported the Moody’s statement at noon Eastern time, causing bears who are short gold to reduce their exposure to losses from further price gains, according to Lutz. “It’s a very crowded, nervous short,” he says. “If I ran a fund, I’d be a contrarian.”