The fear in the gold market right now is palpable and to a contrarian investor that’s a sign of a bottom. Add to that the bullish long-term fundamentals, and now is likely a very good time to begin buying both the metal and the companies that bring it to market.
The time to buy is when there’s blood in the streets
Being a contrarian investor means that you are buying assets when investor sentiment is extremely negative, and selling them when it’s extremely positive. The objective is to buy assets at a discount to their true market value, and sell them when they are overvalued thanks to irrational exuberance. It’s for this reason that contrarian investing and value investing work so well together.
Everyone’s down on gold
Sentiment in the gold market, particularly towards the gold equities, is extremely negative right now, and yet the long-term fundamentals remain very bullish. This 11 year old gold bull market is being driven by powerful structural forces such as currency debasement (which shows up as inflation), and negative real interest rates, and these forces are likely to be with us for many years.
Easy to say but very difficult to do
As a contrarian investor you are doing the exact opposite to the majority of investors. Going against the herd is something which is never easy, especially with the price of gold down 14.6% from its September 2011 high of $1923.70. In addition several prominent market commentators have stated that the gold bull market is over.
Therefore to be a successful contrarian you must have unwavering conviction and that level of conviction only comes from serious homework. And though it never feels good to be a contrarian because you are buying while others are selling and selling while others are buying, the rewards for those with nerves of steel can be huge. In fact, in 18 to 24 months time I expect both gold and gold stocks to be considerably higher.
Too hot to handle
The fact is, most investors can’t handle the volatility that is common in the gold market and as a result they have either been shaken out of the market, or have missed the past 11 years of gains. In my experience the best way to cope with gold’s volatile nature is to accumulate your position gradually over an extended period of time. This is a strategy that works both for the metal and for the stocks.