Why Market Sentiment Doesn't Matter For Gold
- Two Reasons to Ignore Sentiment
Market sentiment doesn't matter for gold.
That statement flies in the face of commonly held wisdom repeated ad nauseum by investment experts and the investing public alike.
I fully expect to be "taken to school" by any number of readers for this statement, but hear me out...
There are two basic reasons why sentiment doesn't matter for gold, or at least not yet.
The first is that gold's price has very little in common with broad market investor sentiment.
If you look at any number of "sentiment" metrics, you can put together a pretty tight little theory that betting against sentiment is almost always profitable.
Take a look at this chart I cribbed from Pragmatic Capitalist which shows consumer sentiment. I've taken the liberty of plotting the S&P 500 index (in red) directly over the sentiment index (in dark blue):
You can see how buying the S&P 500 when sentiment wasextremely bearish and selling when it was extremely bullish would have let you avoid almost all of the market downturn, and let you enjoy nearly all of its uptrend.
But gold behaves differently. Sometimes it rises or falls in tandem with the broad market. Sometimes it moves opposite the market.
Here again, I've plotted the S&P 500 in black, but I've plotted it against gold in gold, for the same time period as above:
You can see that gold is all over the place with respect to the broad market. There are times when gold is a mirror image and times when it's in lock-step.
Even if you back this chart out to 20 years, gold and the S&P 500 have very little in common:
If there's little correlation between the broad market and gold, then it makes little sense to look to broad market sentiment as a primary reason to be long or short gold.
Okay, so my second reason for ignoring sentiment when it comes to gold, is that gold's "rise" in price is due largely to a lack of confidence in paper currency. Fair or not, I'll use the dollar as a stand-in for all paper currencies.
Normally when people talk about the dollar, they'll reference the U.S. dollar index (NYBOT: DX-Y.NYB) - but I find that index to be largely irrelevant to gold. That's because the index trades against other paper currencies in Europe and Asia.
This index can go sky-high, and all it means is that the dollar can buy more Euros/Yen, etc. At the same time, gold can still move much higher.
Over the past three years, gold has doubled, while the dollar index was in a range between 72 and 88 - with seemingly very little correlation between the two.
So it's much more useful to look at gold as a metric for the health of the dollar than it is to look at the dollar index. The world's sentiment for the dollar doesn't matter to gold's price - it's much more like the exact opposite -
The end-game scenario for all paper currency (and all assets, ever) is to return to intrinsic value. How many reams of paper does it take to buy one ounce of gold? Even high quality cotton paper is about $50 for a ream of 500 sheets. At that price it currently takes 24 reams or 12,000 sheets of paper to buy one ounce of gold.
If you think about it long enough, you start to realize that gold isn't valued in dollars. Dollars are measured in how much gold they buy. Over the long-term, sentiment has nothing to do with gold's ability to store value and act as a medium of exchange.
Right now, gold is about $50 off its highs - hovering just above the $1,200 mark.
I don't know how much longer gold will stay at these levels, but it's my belief that this dip is a good opportunity to buy more gold.
And of course, you should consider buying gold stocks as well.
Right now my favorite junior gold company is still selling for under $4 a share. This company mines gold in North America, they trade on the AMEX and they have gold in the ground worth many times their market cap. This company will eventually sell for its intrinsic value - and when it does, today's shareholders will easily see five to ten times their money returned to them.
I strongly advise reading all about this company to see if it's right for your portfolio. Click here for the full story.
Good investing,
Kevin McElroy
Editor
Resource Prospector
