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If you were to scour global markets in search of a beaten-up investment that no one wants, gold would certainly attract your attention. But has it become a contrarian buying opportunity?
The general disdain for gold is reflected in the price: It has fallen to about $1,320 (U.S.) an ounce, down $580 or more than 40 per cent from its record high in 2011. Last year, it suffered its worst annual decline in more than three decades.
That's a remarkable contrast to signs of strength in just about every other major investment. Among developed stock markets, most major indexes are near multiyear or record highs. Bonds are doing okay, emerging markets are bouncing back and oil is on a tear.
According to a recent Gallup poll on the economy and personal finances, gold's popularity is fading fast among regular folks: The percentage of Americans who believe gold is the best long-term investment has fallen to 24 per cent, down from 34 per cent in 2011, while interest in stocks and even real estate has been moving up.
Ronald-Peter Stoeferle, managing director at Incrementum AG, an asset manager based in Liechtenstein, believes that speculators and professional fund managers are also losing interest, pointing to weak money flows and bearish investment surveys.
"The majority of bulls appear to have thrown in the towel," he said in a 94-page report on gold, released on Tuesday.
He argues that that's not such a bad thing: "We like the fact that the consensus considers the gold bull market over. Gold is now a contrarian investment."
You can understand why investors have been shying away. During gold's remarkable rally to $1,900 an ounce, many gold enthusiasts went well beyond the view that gold provided portfolio stability during volatile times for the economy.
They contended that gold was still in the early stages of a rally driven by extraordinary stimulus efforts by central banks. As they saw it, stimulus would feed surging inflation and a collapse in major currencies.
These scenarios haven't panned out. The U.S. dollar is still the world's reserve currency; and U.S. inflation hasn't risen above 2.3 per cent since the end of the financial crisis, after accounting for volatile food and energy items.
Of course, the best contrarian ideas usually have less than ideal backdrops – that's what makes them contrarian. Gold, and even gold-mining stocks, look intriguing as investor sentiment increasingly turns away.
But gold has one big problem to overcome before it can be truly embraced as a contrarian bet: Sentiment should turn toward capitulation.
Right now, that's hard to see. As low as the gold price has fallen, it is still elevated relative to recent history. It is 60 per cent higher since the collapse of Lehman Brothers in 2008. It is 100 per cent higher since the days before the financial crisis, in 2007.
The current price is down, but it's hardly in the bargain bin.
As well, the world's most intriguing bet on gold – hedge fund manager John Paulson's $1.3-billion investment in the SPDR Gold Trust exchange-traded fund – is still on, which suggests that sentiment isn't as low as it could be.
Sure, Mr. Paulson cut his gold stake in half last year, which is an encouraging sign for contrarians. But his remaining bet is still massive, at 10.2 million units, making him the fund's largest investor by far and a source of inspiration for bullish holdouts.
As a contrarian bet, gold has a lot going for it right now, as a rare example of an underperforming asset and dwindling interest.
But the risk of missing out on a rebound in gold isn't nearly as bad as the risk of buying in too soon.
David Berman